rugman versus Rogoff?
Twee pessimisten, de een preekt een gat in de hand voor de overheid en de ander een fatalistisch bezuinigingsbeleid (wat je ook doet, het helpt niet, alleen tijd heelt de wonden).
Kroegman zou zich sinds augustus inbijten tegen Rog of, zoals hij dat vroeger met Bus deed.
De Amerikaanse droom is uit. De welvaartsstijging sinds 1981 is volledig gebaseerd op steeds meer schulden maken tegen een steeds lagere rente. Dat ontmoette zijn Mynski moment en toen klapte de ballon.
De welvaartsstijging was niet gebaseerd op loonstijging die de productiviteitsstijging bijhield. Het inkomen in totaal hield de productiviteitsstijging wel bij, maar dat kwam alleen bij de rijken terecht.
Er is in de rijke landen een soort fatalisme aan het ontstaan, dat je niet meer rijk kunt worden, dat je het slechter hebt dan je babyboomende vader en dat je kinderen het nog slechter krijgen.
De analyse van RR heeft enige nadelen (bepaalde perioden waren nu eenmaal deflatoir/ inflatoir en daar had het schuldniveau weinig invloed op; de mix van landen blijft altijd een probleem).
De basisgedachte dat schuld tot een bepaald niveau weinig problemen oplevert, maar boven een bepaald niveau (“cusp” zo zeggen ze dat bij credits) wel en zelfs accelererende, exponentieel groeiende problemen, gaat er bij mij in als koek. Op zeker moment (Mynski) zit je in de fuik en dan zijn de poppen aan het dansen (en wel voor een hele tijd, de poppen worden nooit moe lijkt het wel).
Debt and growth revisited
Carmen M. Reinhart Kenneth Rogoff
11 August 2010
http://www.voxeu.org/index.php?q=node/5395
Investment Chart Kondratiev Wave
Tuesday, 24 August 2010
hypotheegarantie nodig
Het plaatje uit de WSJ vertelt boekdelen: de banken hebben niet genoeg kapitaal om Mc Mansions van voldoende hypotheek te voorzien. Er is een enorm gat tussen de deposito's die baken vangen en wat nodig is voor de kredietverstrekking.
Dat gat werd vroeger opgevuld via securitisatie. Nu niet en daarom gaat het herstel van de huizenmarkt zo moeizaam, terwijl huizenprijzen toch zo goedkoop zijn in de VS bij een heel lage hypotheekrente.
Het plaatje zegt het allemaal: er moet iets gebeuren om hypotheken in de VS weer een soepele funding te geven. Banken hebben gewoon niet genoeg geld in combinatie met hun depositobasis. De overheid moet inspringen om securitisatie wer los te krijgen, zodat het weer wel kan. Dat kan door tegen een bepaalde fee een garantie af te geven. Deze vergoeding moet kostendekkend zijn maar niet excessief.
Gaat dit gebeuren? Gezien de braakneiging verhalen naar Rosenbaum toe zeker niet.
New Fees Weighed for Mortgage Industry
By DEBORAH SOLOMON And NICK TIMIRAOS
24/8/2010 http://online.wsj.com/article/SB10001424052748703846604575447961501122340.html?mod=WSJ_hps_LEFTWhatsNews
he Obama administration may propose that any federal backing of mortgages be paid for through fees on the lending industry, according to people familiar with the internal discussions
While the administration hasn't settled on a plan to revamp failed mortgage giants Fannie Mae and Freddie Mac, which are now under federal supervision, a consensus appears to be emerging that some type of government guarantee will be needed to keep the ailing mortgage market functioning.
Some conservatives don't believe the government should offer any type of guarantee, while others advocate limited, but explicit, backing. About nine in 10 new loans are currently backed by Fannie, Freddie or government agencies.
Policy makers face challenges determining what types of loans or mortgage-backed securities should be guaranteed and how the industry should be charged for government backing. Government officials want the cost of any explicit guarantee fully offset by the mortgage industry to avoid adding to the federal budget deficit.
But Washington must walk a fine line between pricing a guarantee high enough so it accurately reflects risk, while not charging so much that borrowing costs soar.
At a housing-finance conference last week, Treasury Secretary Timothy Geithner cited a "strong case" for a continued federal guarantee but said "the challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure."
Officials want to avoid a repeat of what happened to Fannie and Freddie, which had to be bailed out and taken over by the government in 2008 after losses destabilized the firms. Mr. Geithner and others have said the firms wrongly guaranteed increasingly risky mortgages without charging enough to cover the risk.
Others warn the government has a poor track record when deciding how to price guarantees. While guarantees provided by the Federal Housing Administration, which insures mortgages, have traditionally turned a profit for the U.S., in recent months that agency has depleted its reserves and risks running out of money.
It's very hard to know what the right fee is," said Alex Pollock, resident fellow at the conservative American Enterprise Institute think-tank, who supports moving to a fully private mortgage market. "The argument will always be from homebuilders, realtors, affordable housing groups, consumer groups and members of Congress that you're charging too much and making it too expensive for borrowers."
The National Association of Realtors, for example, is asking the Treasury to reduce interest payments Fannie and Freddie must currently make to the government, arguing that easing the firms' expenses could produce more flexible lending standards. In a letter to Mr. Geithner this month, the organization said the Treasury should retroactively lower the 10% dividend the firms must pay on the $148 billion in taxpayer aid they have used.
The industry appears prepared to pay some type of premium to get the government's backing. Under proposals floated by two trade groups, the Financial Services Roundtable and the Mortgage Bankers Association, new private-sector entities created to securitize and insure mortgages would pay a fee into a government-insurance fund.
Researchers at the New York Federal Reserve Bank, writing on their own behalf, have proposed creating lender-owned cooperatives that would replace Fannie and Freddie. Private lenders would pay into a "mutualized loss pool" to provide guarantees for mortgage-backed securities, and members would also pay a reinsurance fee to the government for a separate fund to backstop additional losses.
Some investors and academics say a government backstop is needed if the U.S. wants to facilitate securitization markets, where investors buy bonds backed by pools of mortgages. While mortgages were once funded primarily through the banking system, securitization fueled the growth of the nation's $10 trillion mortgage market over the past 30 years, dwarfing the capacity of the nation's banking system to fund loans.
"To suggest the private market can come back in and take the place [of the government] is simply impractical. It won't work," said Pacific Investment Management's Bill Gross at last week's summit.
Write to Deborah Solomon at deborah.solomon@wsj.com and Nick Timiraos at nick.timiraos@wsj.com
DNB blundert volgens sweeder van Wijnbergen
In de NRC van 24 augustus (DNB b.undert bij pensioentoezicht) fulmineert sweeder van Wijnbergen stevig tegen DNB.
Niet zo zeer de pensioenbestuurders moeetn bijgeschoold worde als de toezichthouders bij DNB. Ze richten gedachteloos met procedures uit het oude normaal grote schde toe in de tijden van het neiuwe normaal.
Hij richt zijn pijlen vooral op Joanne Kelderman, directeur pensioentoezicht bij DNB: doodleuk vertelt zij dat de rente niet laag is en er geen aanwijzing is dat de rente gaat stijgen. Hij noemt dat wereldvreemde onwetendheid, die alleen als verbijsterend incompetent kan worden omschreven.
Van Wijnbergen stelt dat de inflatieverwachting 2% is in Europa en daar hoort een opslag van 2,5% op.
De swaprente krijgt het ook zwaar te verduren (ook wel wat ten onrechte). deze zou kunstmatig onder de staatsleningenrente liggen (goed verklaarbaar bij begrotingstekorten van de overheid van 5 tot 15%).
De rente fluctueert gewoon te veel vooor een stabiel beleid.
Incompetentie is schrikbarend omdat DNB niet ingreep toen het nodig is en nu het niet nodig is wel ingrijpt.
Niet zo zeer de pensioenbestuurders moeetn bijgeschoold worde als de toezichthouders bij DNB. Ze richten gedachteloos met procedures uit het oude normaal grote schde toe in de tijden van het neiuwe normaal.
Hij richt zijn pijlen vooral op Joanne Kelderman, directeur pensioentoezicht bij DNB: doodleuk vertelt zij dat de rente niet laag is en er geen aanwijzing is dat de rente gaat stijgen. Hij noemt dat wereldvreemde onwetendheid, die alleen als verbijsterend incompetent kan worden omschreven.
Van Wijnbergen stelt dat de inflatieverwachting 2% is in Europa en daar hoort een opslag van 2,5% op.
De swaprente krijgt het ook zwaar te verduren (ook wel wat ten onrechte). deze zou kunstmatig onder de staatsleningenrente liggen (goed verklaarbaar bij begrotingstekorten van de overheid van 5 tot 15%).
De rente fluctueert gewoon te veel vooor een stabiel beleid.
Incompetentie is schrikbarend omdat DNB niet ingreep toen het nodig is en nu het niet nodig is wel ingrijpt.
Het pensioenstelsel klapt gegarandeerd
Hieronder herhaal ik de posten op mijn blog van 13 maart en 10 maart
Drie jaar geleden moest ik prikkelende stellingen verzinnen voor een discussiebijeenkomst met pensioenfondsklanten in verschillende sessies. Mijn stelling: “Het pensioenstelsel klapt gegarandeerd!” werd uiteraard te gevaarlijk bevonden om te bediscussiëren. Zo veel prikkel was te veel van het goede.
Ik had vier goede redenen, die overigens nog steeds gelden, dat er een grote kans was dat het Defined Benefit pensioenstelsel onhoudbaar zou kunnen worden. Aan de beleggingskant loerden twee risico’s: een met veel hogere kans dan waarmee men rekening hield op een zeer negatief rendement op zakelijke waarden (=afstempelen op verplichtingen dreigt dan; in ALM studies zou dat hooguit eens in 1000 jaar gebeuren, maar een blik op beleggingsreeksen leerde dat dit eens in de ongeveer 25 jaar gebeurde) en een met wel degelijk niet te verwaarlozen kans een te lage zeer lange rente (=pensioenpremie wordt dan onbetaalbaar; bij een 30-jaar rente die enige tijd onder ongeveer 2.5% blijft is het denk ik onmiddellijk einde oefening voor Defined Benefit). Aan de verplichtingenkant had je ook twee grote risico’s: het langlevenrisico (=onvoorwaardelijke verplichtingen fors onderschat omdat we veel ouder worden dan de oude sterftetafels toen aangaven, dit moet bijgefinancierd worden) en de gemiddelde doorsneepremie (die zorgt ervoor dat iemand per jaar tegen dezelfde premie even veel pensioenrechten opbouwt als % van het inkomen of je nou 25 bent of 64; dit leidt tot grote winsten op jongeren die de grote verliezen van de 55-plussers moeten compenseren; dit is onhoudbaar als er te weinig jongeren zijn).
De eerstgenoemde drie risico’s hebben nog harder toegeslagen dan ik toen voor mogelijk hield en worden nu goed (misschien wel te goed) onderkend. Over het vierde risico blijft het nog muisstil, maar vooral dit is een onhoudbare situatie.
Het artikel vandaag van Onno Steenbeek in Het Financieele Dagblad: “Geef pensioenfondsen ruimte” is me om een vijfde risico (uitgaan van een te laag rendement) voor de houdbaarheid van het pensioenstelsel uit het hart gegrepen. De ondertitel: “laag inboeken van rendementsopbrengst leidt tot massale versobering regelingen” slaat de spijker op zijn kop. Als we prudent toegeven aan het advies van de commissie Don dat het verwacht rendement van aandelen 6% moet zijn, is het huidige Defined Benefit systeem nog sneller ten dode opgeschreven dan nu al het geval is. Bij de 7% zoals de verstandigere sociale partners voorstellen vallen de berekeningen veel minder rampzalig uit. Het is dan veel beter mogelijk om een enigszins geïndexeerd pensioen op te bouwen tegen enigszins betaalbare premies.
Die 1% maakt een wereld van verschil. Zoals Steenbeek opmerkt kan die 1% het pensioensysteem de nek breken. Het lijkt niet veel maar de ervaringen in Engeland hebben geleerd dat op het oog betrekkelijk kleine verslechteringen desastreus zullen zijn.
Het bestaansrecht van collectief sparen in een kapitaaldekkingsysteem voor een pensioen bij een stabiele demografie is weg als het (verwacht) rendement lager is dan groei van het nominale BNP (Aaron conditie). Dan kun je beter een omslagstelsel hanteren.
Ik blijf uiteraard van mening dat goede rendementen mogelijk zijn –Voorspoed komt! zegt ons boek Beleggen op de golven immers- en pensioenfondsen houden daarom hun bestaansrecht als ze maar voldoende in zakelijke waarden beleggen (en hun risico acceptabel houden door het renterisico grotendeels te matchen). Te veel pessimisme zie ik nu als het grootste gevaar voor het voortbestaan van het Defined Benefit systeem.
En uiteraard blijf ik van mening dat een Defined Benefit pensioensysteem een zeer waardevol goed is, iets dat zeer de moeite waard is om voor te vechten.
De grootste bedreiging voor het pensioenstelsel zit in nieuwe boekhoudregels. In Nederland zijn die voor pensioenfondsen neergeslagen in het nieuwe Financiële ToezichtsKader (nFTK).Voor het bedrijfsleven is dat o.a. IAS19.
Wat er gebeurt is dat een en ander zo veel mogelijk op marktwaarde moet worden gewaardeerd. Die marktwaarde fluctueert verschrikkelijk, zowel aan de verplichtingenkant als aan de beleggingskant.
Voor pensioenfondsen betekende dit een diepgaande analyse van derivaten om o.a. het renterisico af te dekken en een veel betere risicoanalyse. Er was en is ineens een sprong in de kennis van bestuurders nodig.
Voor het bedrijfsleven betekent dit dat over enige tijd (2012?) de resultaten van het pensioenfonds keihard de resultatenrekening binnenkomen, veel harder dan bij de huidige uitgesmeerde methode van nu ("corridormethode").
De winsten en verliezen en de actuariële tekorten kunnen gigantisch zijn vergeleken met de resultaten uit normale bedrijfsvoering en de balans.
De logische reactie van het bedrijfsleven is zo snel mogelijk van die pensioeninvloeden af te komen. Dat veroorzaakt een enorme druk om over te gaan van defined benefit naar defined contribution.
Die overgang betekent dat nieuwe pensioenspaarders in een defined contribution systeem komen, waarbij ze geen zekerheid meer hebben of ze genoeg bij elkaar gaan sparen voor de oude dag. Ze zijn helemaal afhankelijk van het rendement op hun beleggingen. Dat rendement heb je niet in de hand. Je kunt zo maar tegen een lange periode van zeer lage rente en/of zeer negatieve rendementen op zakelijke waarden aanlopen.
Ik heb wel eens berekend dat bij defined contribution ca. 40% van je pensioenresultaat behaald wordt in de laatste tien jaar voor je met pensioen gaat. Als dat toevallig slechte beleggingsjaren zijn ben je erg slecht af. Het is veel beter dit soort invloeden solidair glad te strijken over de generaties heen. 100% glad strijken is niet redelijk bij een vergrijzende samenleving, maar een behoorlijke solidariteit is toch wel broodnodig. Je kunt tegen mensen met een modaal inkomen straks toch niet gaan zeggen dat ze op een houtje moeten bijten omdat de beleggingsresultaten in de afgelopen tien jaren zo slecht waren. Je kunt dat risico uiteraard verminderen door zo risicoloos mogelijk te beleggen in de laatste tien jaar, maar dan bouw je zeer flink minder pensioen op dan gemiddeld zou gebeuren in een solidair defined benefit systeem.
Het bestaansrecht van een pensioenfonds is het goede rendement op lange termijn vergeleken met de lange rente (die op lange termijn gemiddeld in de pas loopt met de groei van het BNP) en dat is vooral ook een goed rendement, omdat een pensioenfonds zo'n lange horizon heeft en in het solidaire geval ook nog (beschaafd!) risico kan nemen voor 55-65 jarigen en ouder. Nederlandse pensioenfondsen zijn in staat die goede rendementen te genereren als ze niet te pessimistisch worden en zijn daarom zo'n grote aanwinst voor de Nederlandse economie!
N.B. Het voortbestaan van het Defined Benefit system hangt vooral af van het optimisme dat het bedrijfsleven en de vakbonden over een paar jaar zullen hebben over de mogelijkheden voor een pensioenfonds om een voldoende rendement te behalen: de rekenrente mag niet te ver onder 4% liggen (anders wordt premie onbetaalbaar), er moet een goed vooruitzicht zijn dat (met bijvoorbeeld een portefeuille van 40% zakelijke waarden en 60% vastrentende waarden) een extra rendement mogelijk is waarbij je kunt indexeren voor inflatie (ongeveer 2% extra) en waarmee je het langlevenrisico kunt opvangen (ongeveer 1% extra nodig).
De afgelopen 140 jaar was dit gemiddeld mogelijk (zie onze beleggingskaart waarin je kunt zien dat er reële koersstijging is op aandelen en je ook nog inkomen uit dividend krijgt)). Het is dus niet zo onredelijk om te verwachten dat het in de komende 50 jaar ook kan.
Als men toegeeft aan de maatschappelijke druk of omdat men ertoe gedwongen is door de lage dekkingsgraad om vrijwel niets meer in zakelijke waarden te beleggen, is het in ieder geval snel gedaan met het Defined Benefit systeem.
N.B. Nogmaals: De meningen zoals geventileerd in mijn blog zijn op persoonlijke titel en kunnen en zullen in diverse gevallen afwijken van de mening van F&C.
Drie jaar geleden moest ik prikkelende stellingen verzinnen voor een discussiebijeenkomst met pensioenfondsklanten in verschillende sessies. Mijn stelling: “Het pensioenstelsel klapt gegarandeerd!” werd uiteraard te gevaarlijk bevonden om te bediscussiëren. Zo veel prikkel was te veel van het goede.
Ik had vier goede redenen, die overigens nog steeds gelden, dat er een grote kans was dat het Defined Benefit pensioenstelsel onhoudbaar zou kunnen worden. Aan de beleggingskant loerden twee risico’s: een met veel hogere kans dan waarmee men rekening hield op een zeer negatief rendement op zakelijke waarden (=afstempelen op verplichtingen dreigt dan; in ALM studies zou dat hooguit eens in 1000 jaar gebeuren, maar een blik op beleggingsreeksen leerde dat dit eens in de ongeveer 25 jaar gebeurde) en een met wel degelijk niet te verwaarlozen kans een te lage zeer lange rente (=pensioenpremie wordt dan onbetaalbaar; bij een 30-jaar rente die enige tijd onder ongeveer 2.5% blijft is het denk ik onmiddellijk einde oefening voor Defined Benefit). Aan de verplichtingenkant had je ook twee grote risico’s: het langlevenrisico (=onvoorwaardelijke verplichtingen fors onderschat omdat we veel ouder worden dan de oude sterftetafels toen aangaven, dit moet bijgefinancierd worden) en de gemiddelde doorsneepremie (die zorgt ervoor dat iemand per jaar tegen dezelfde premie even veel pensioenrechten opbouwt als % van het inkomen of je nou 25 bent of 64; dit leidt tot grote winsten op jongeren die de grote verliezen van de 55-plussers moeten compenseren; dit is onhoudbaar als er te weinig jongeren zijn).
De eerstgenoemde drie risico’s hebben nog harder toegeslagen dan ik toen voor mogelijk hield en worden nu goed (misschien wel te goed) onderkend. Over het vierde risico blijft het nog muisstil, maar vooral dit is een onhoudbare situatie.
Het artikel vandaag van Onno Steenbeek in Het Financieele Dagblad: “Geef pensioenfondsen ruimte” is me om een vijfde risico (uitgaan van een te laag rendement) voor de houdbaarheid van het pensioenstelsel uit het hart gegrepen. De ondertitel: “laag inboeken van rendementsopbrengst leidt tot massale versobering regelingen” slaat de spijker op zijn kop. Als we prudent toegeven aan het advies van de commissie Don dat het verwacht rendement van aandelen 6% moet zijn, is het huidige Defined Benefit systeem nog sneller ten dode opgeschreven dan nu al het geval is. Bij de 7% zoals de verstandigere sociale partners voorstellen vallen de berekeningen veel minder rampzalig uit. Het is dan veel beter mogelijk om een enigszins geïndexeerd pensioen op te bouwen tegen enigszins betaalbare premies.
Die 1% maakt een wereld van verschil. Zoals Steenbeek opmerkt kan die 1% het pensioensysteem de nek breken. Het lijkt niet veel maar de ervaringen in Engeland hebben geleerd dat op het oog betrekkelijk kleine verslechteringen desastreus zullen zijn.
Het bestaansrecht van collectief sparen in een kapitaaldekkingsysteem voor een pensioen bij een stabiele demografie is weg als het (verwacht) rendement lager is dan groei van het nominale BNP (Aaron conditie). Dan kun je beter een omslagstelsel hanteren.
Ik blijf uiteraard van mening dat goede rendementen mogelijk zijn –Voorspoed komt! zegt ons boek Beleggen op de golven immers- en pensioenfondsen houden daarom hun bestaansrecht als ze maar voldoende in zakelijke waarden beleggen (en hun risico acceptabel houden door het renterisico grotendeels te matchen). Te veel pessimisme zie ik nu als het grootste gevaar voor het voortbestaan van het Defined Benefit systeem.
En uiteraard blijf ik van mening dat een Defined Benefit pensioensysteem een zeer waardevol goed is, iets dat zeer de moeite waard is om voor te vechten.
De grootste bedreiging voor het pensioenstelsel zit in nieuwe boekhoudregels. In Nederland zijn die voor pensioenfondsen neergeslagen in het nieuwe Financiële ToezichtsKader (nFTK).Voor het bedrijfsleven is dat o.a. IAS19.
Wat er gebeurt is dat een en ander zo veel mogelijk op marktwaarde moet worden gewaardeerd. Die marktwaarde fluctueert verschrikkelijk, zowel aan de verplichtingenkant als aan de beleggingskant.
Voor pensioenfondsen betekende dit een diepgaande analyse van derivaten om o.a. het renterisico af te dekken en een veel betere risicoanalyse. Er was en is ineens een sprong in de kennis van bestuurders nodig.
Voor het bedrijfsleven betekent dit dat over enige tijd (2012?) de resultaten van het pensioenfonds keihard de resultatenrekening binnenkomen, veel harder dan bij de huidige uitgesmeerde methode van nu ("corridormethode").
De winsten en verliezen en de actuariële tekorten kunnen gigantisch zijn vergeleken met de resultaten uit normale bedrijfsvoering en de balans.
De logische reactie van het bedrijfsleven is zo snel mogelijk van die pensioeninvloeden af te komen. Dat veroorzaakt een enorme druk om over te gaan van defined benefit naar defined contribution.
Die overgang betekent dat nieuwe pensioenspaarders in een defined contribution systeem komen, waarbij ze geen zekerheid meer hebben of ze genoeg bij elkaar gaan sparen voor de oude dag. Ze zijn helemaal afhankelijk van het rendement op hun beleggingen. Dat rendement heb je niet in de hand. Je kunt zo maar tegen een lange periode van zeer lage rente en/of zeer negatieve rendementen op zakelijke waarden aanlopen.
Ik heb wel eens berekend dat bij defined contribution ca. 40% van je pensioenresultaat behaald wordt in de laatste tien jaar voor je met pensioen gaat. Als dat toevallig slechte beleggingsjaren zijn ben je erg slecht af. Het is veel beter dit soort invloeden solidair glad te strijken over de generaties heen. 100% glad strijken is niet redelijk bij een vergrijzende samenleving, maar een behoorlijke solidariteit is toch wel broodnodig. Je kunt tegen mensen met een modaal inkomen straks toch niet gaan zeggen dat ze op een houtje moeten bijten omdat de beleggingsresultaten in de afgelopen tien jaren zo slecht waren. Je kunt dat risico uiteraard verminderen door zo risicoloos mogelijk te beleggen in de laatste tien jaar, maar dan bouw je zeer flink minder pensioen op dan gemiddeld zou gebeuren in een solidair defined benefit systeem.
Het bestaansrecht van een pensioenfonds is het goede rendement op lange termijn vergeleken met de lange rente (die op lange termijn gemiddeld in de pas loopt met de groei van het BNP) en dat is vooral ook een goed rendement, omdat een pensioenfonds zo'n lange horizon heeft en in het solidaire geval ook nog (beschaafd!) risico kan nemen voor 55-65 jarigen en ouder. Nederlandse pensioenfondsen zijn in staat die goede rendementen te genereren als ze niet te pessimistisch worden en zijn daarom zo'n grote aanwinst voor de Nederlandse economie!
N.B. Het voortbestaan van het Defined Benefit system hangt vooral af van het optimisme dat het bedrijfsleven en de vakbonden over een paar jaar zullen hebben over de mogelijkheden voor een pensioenfonds om een voldoende rendement te behalen: de rekenrente mag niet te ver onder 4% liggen (anders wordt premie onbetaalbaar), er moet een goed vooruitzicht zijn dat (met bijvoorbeeld een portefeuille van 40% zakelijke waarden en 60% vastrentende waarden) een extra rendement mogelijk is waarbij je kunt indexeren voor inflatie (ongeveer 2% extra) en waarmee je het langlevenrisico kunt opvangen (ongeveer 1% extra nodig).
De afgelopen 140 jaar was dit gemiddeld mogelijk (zie onze beleggingskaart waarin je kunt zien dat er reële koersstijging is op aandelen en je ook nog inkomen uit dividend krijgt)). Het is dus niet zo onredelijk om te verwachten dat het in de komende 50 jaar ook kan.
Als men toegeeft aan de maatschappelijke druk of omdat men ertoe gedwongen is door de lage dekkingsgraad om vrijwel niets meer in zakelijke waarden te beleggen, is het in ieder geval snel gedaan met het Defined Benefit systeem.
N.B. Nogmaals: De meningen zoals geventileerd in mijn blog zijn op persoonlijke titel en kunnen en zullen in diverse gevallen afwijken van de mening van F&C.
Monday, 23 August 2010
huizen zijn kruizen
huizenprijzen stujgen 1,1% harder dan inflatie in de VS.
In de VS begint men de prijstijging van huizente zien zoals met het in de eerste helft van de 20ste eeuw zag: je moest langzaam je huis afschrijven totdat het opgebruikt is.
Het is allemaal de schuld van de babyboomers die te vel huizen kochten en banken afpersten om een hypothek te geven.
De Amerikaanse droom is uit: door een huis te kopen verdien je geen cruises en boten uit de overwaarde meer.
Omdat lonen de afgelopen 40 jaar maar 10% stegen in reële prijzen,kwam bijna alle welvaart uit het steeds meer lenen tegen je inkomen en huis. God straft nu de babyboomers en hun opvolgers, de lost generations.
Housing Fades as a Means to Build Wealth, Analysts SayBy DAVID STREITFELD
Published: August 22, 2010 http://www.nytimes.com/2010/08/23/business/economy/23decline.html?src=me&ref=general
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
Ritholtz The Big Picture
Housing: No Longer A Sure-Fire Wealth Builder
I spoke with David Streitfeld of the NYT last week about the future prospects for Homes as an investment (I have a short quote in today’s Housing Fades as a Means to Build Wealth, Analysts Say):
“Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.”
I don’t disagree much with any of the others quoted in the article. (Stan Humphries, chief economist for Zillow; Yale’s Bob Shiller; Dean Baker of Center for Economic and Policy Research). I find our variances are mostly matters of nuance.
The chat I had with Mr. Streitfeld ranged far and wide, and tried to put some context on the entire Housing problem, which remains poorly understood by many. The rest of the conversation was rather intriguing. Some of the ideas batted about include:
• Housing over the past century managed to just outpace inflation (by 1.1%, according to Shiller);
• The bond bull market that began in the late 1970s has driven mortgage rates down from the peak by as much as two/thirds — as high as 15% down to ~5%.
• The post WWII growth of suburbs and the subsequent baby-boom demographic surge created a massive demand for Housing unlikely to be equaled inthe next few decades;
• The three decade long decrease in the cost of credit was an enormous source of Real Estate appreciation over that same period (1980-2005);
• Bull Markets eventually end with a blowoff top; In doing so, they pull forward a decade or more of future returns;
• We remain 5-15% overvalued n home prices nationally; That could be worked off by a big drop tomorrow, or by a 7-15 year period of no appreciation, depending upon inflation and wage gains;
• Housing has problems with both too much supply and not enough demand. Bring in 3 million qualified home buyers from abroad and the Housing issue goes away.
A few other thoughts worth sharing:
It is safe to buy 2 kinds of properties right now: The first is simply math: If you are planning on living in a specific location for at least 10 years , then the calculus of rent vs own likely favors the buyer once you figure in mortgage tax deduction. The numbers are obviously determinative, so do the math of your income, tax situation, and alternative rental options. Renting might put you into a less desirable school district in parts of the country; that is a non-monetary factor that needs to be considered.
Second, I would not be afraid to buy a “unique” or vacation property. By unique, I mean not a tract home or development, but a something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced. The kind that 10 years from now, you kick yourself for not buying. A truly unique purchase avoid Real Estate regret.
I was surprised when he mentioned I was one of the more bullish housing analysts he spoke with! My answer to that was the time to be an über-bear on Housing (or anything, really) is before the collapse — not afterwards.
Lastly, I must always remind people that there are no such things as toxic assets — only toxic prices.
In de VS begint men de prijstijging van huizente zien zoals met het in de eerste helft van de 20ste eeuw zag: je moest langzaam je huis afschrijven totdat het opgebruikt is.
Het is allemaal de schuld van de babyboomers die te vel huizen kochten en banken afpersten om een hypothek te geven.
De Amerikaanse droom is uit: door een huis te kopen verdien je geen cruises en boten uit de overwaarde meer.
Omdat lonen de afgelopen 40 jaar maar 10% stegen in reële prijzen,kwam bijna alle welvaart uit het steeds meer lenen tegen je inkomen en huis. God straft nu de babyboomers en hun opvolgers, de lost generations.
Housing Fades as a Means to Build Wealth, Analysts SayBy DAVID STREITFELD
Published: August 22, 2010 http://www.nytimes.com/2010/08/23/business/economy/23decline.html?src=me&ref=general
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
Ritholtz The Big Picture
Housing: No Longer A Sure-Fire Wealth Builder
I spoke with David Streitfeld of the NYT last week about the future prospects for Homes as an investment (I have a short quote in today’s Housing Fades as a Means to Build Wealth, Analysts Say):
“Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.”
I don’t disagree much with any of the others quoted in the article. (Stan Humphries, chief economist for Zillow; Yale’s Bob Shiller; Dean Baker of Center for Economic and Policy Research). I find our variances are mostly matters of nuance.
The chat I had with Mr. Streitfeld ranged far and wide, and tried to put some context on the entire Housing problem, which remains poorly understood by many. The rest of the conversation was rather intriguing. Some of the ideas batted about include:
• Housing over the past century managed to just outpace inflation (by 1.1%, according to Shiller);
• The bond bull market that began in the late 1970s has driven mortgage rates down from the peak by as much as two/thirds — as high as 15% down to ~5%.
• The post WWII growth of suburbs and the subsequent baby-boom demographic surge created a massive demand for Housing unlikely to be equaled inthe next few decades;
• The three decade long decrease in the cost of credit was an enormous source of Real Estate appreciation over that same period (1980-2005);
• Bull Markets eventually end with a blowoff top; In doing so, they pull forward a decade or more of future returns;
• We remain 5-15% overvalued n home prices nationally; That could be worked off by a big drop tomorrow, or by a 7-15 year period of no appreciation, depending upon inflation and wage gains;
• Housing has problems with both too much supply and not enough demand. Bring in 3 million qualified home buyers from abroad and the Housing issue goes away.
A few other thoughts worth sharing:
It is safe to buy 2 kinds of properties right now: The first is simply math: If you are planning on living in a specific location for at least 10 years , then the calculus of rent vs own likely favors the buyer once you figure in mortgage tax deduction. The numbers are obviously determinative, so do the math of your income, tax situation, and alternative rental options. Renting might put you into a less desirable school district in parts of the country; that is a non-monetary factor that needs to be considered.
Second, I would not be afraid to buy a “unique” or vacation property. By unique, I mean not a tract home or development, but a something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced. The kind that 10 years from now, you kick yourself for not buying. A truly unique purchase avoid Real Estate regret.
I was surprised when he mentioned I was one of the more bullish housing analysts he spoke with! My answer to that was the time to be an über-bear on Housing (or anything, really) is before the collapse — not afterwards.
Lastly, I must always remind people that there are no such things as toxic assets — only toxic prices.
The end of management
In een artikel in de WSJ wordt beschreven hoe je via colaborisation heel veel voor elkaar kunt krijgen als individuen. Met enkele individuen kun je een grote klus klaren.
Wikipedia is het bekendste voorbeeld.
Succesvolle innovatie zal steeds meer zo gaan, veel minder via grote bedrijven met goed management.
De ontwikkeling van management was een van de grote innovaties van de 20ste eeuw.
The End of Management
Corporate bureaucracy is becoming obsolete. Why managers should act like venture capitalists
WSJ August 21
http://online.wsj.com/article/SB10001424052748704476104575439723695579664.html?mod=WSJ_hps_InDepthCarousel_1
Business guru Peter Drucker called management "the most important innovation of the 20th century." It was well-justified praise. Techniques for running large corporations, pioneered by men like Alfred Sloan of General Motors and refined at a bevy of elite business schools, helped fuel a century of unprecedented global prosperity.
But can this great 20th century innovation survive and thrive in the 21st? Evidence suggests: Probably not. "Modern" management is nearing its existential moment.
Corporations, whose leaders portray themselves as champions of the free market, were in fact created to circumvent that market. They were an answer to the challenge of organizing thousands of people in different places and with different skills to perform large and complex tasks, like building automobiles or providing nationwide telephone service.
In the relatively simple world of 1776, when Adam Smith wrote his classic "Wealth of Nations," the enlightened self-interest of individuals contracting separately with each other was sufficient to ensure economic progress. But 100 years later, the industrial revolution made Mr. Smith's vision seem quaint. A new means of organizing people and allocating resources for more complicated tasks was needed. Hence, the managed corporation—an answer to the central problem of the industrial age.
For the next 100 years, the corporation served its purpose well. From Henry Ford to Harold Geneen, the great corporate managers of the 20th century fed the rise of a vast global middle class, providing both the financial means and the goods and services to bring luxury to the masses.
In recent years, however, most of the greatest management stories have been not triumphs of the corporation, but triumphs over the corporation. General Electric's Jack Welch may have been the last of the great corporate builders. But even Mr. Welch was famous for waging war on bureaucracy. Other management icons of recent decades earned their reputations by attacking entrenched corporate cultures, bypassing corporate hierarchies, undermining corporate structures, and otherwise using the tactics of revolution in a desperate effort to make the elephants dance. The best corporate managers have become, in a sense, enemies of the corporation.
The reasons for this are clear enough. Corporations are bureaucracies and managers are bureaucrats. Their fundamental tendency is toward self-perpetuation. They are, almost by definition, resistant to change. They were designed and tasked, not with reinforcing market forces, but with supplanting and even resisting the market.
Yet in today's world, gale-like market forces—rapid globalization, accelerating innovation, relentless competition—have intensified what economist Joseph Schumpeter called the forces of "creative destruction." Decades-old institutions like Lehman Brothers and Bear Stearns now can disappear overnight, while new ones like Google and Twitter can spring up from nowhere. A popular video circulating the Internet captures the geometric nature of these trends, noting that it took radio 38 years and television 13 years to reach audiences of 50 million people, while it took the Internet only four years, the iPod three years and Facebook two years to do the same. It's no surprise that fewer than 100 of the companies in the S&P 500 stock index were around when that index started in 1957.
Even the best-managed companies aren't protected from this destructive clash between whirlwind change and corporate inertia. When I asked members of The Wall Street Journal's CEO Council, a group of chief executives who meet each year to deliberate on issues of public interest, to name the most influential business book they had read, many cited Clayton Christensen's "The Innovator's Dilemma." That book documents how market-leading companies have missed game-changing transformations in industry after industry—computers (mainframes to PCs), telephony (landline to mobile), photography (film to digital), stock markets (floor to online)—not because of "bad" management, but because they followed the dictates of "good" management. They listened closely to their customers. They carefully studied market trends. They allocated capital to the innovations that promised the largest returns. And in the process, they missed disruptive innovations that opened up new customers and markets for lower-margin, blockbuster products.
The weakness of managed corporations in dealing with accelerating change is only half the double-flanked attack on traditional notions of corporate management. The other half comes from the erosion of the fundamental justification for corporations in the first place.
British economist Ronald Coase laid out the basic logic of the managed corporation in his 1937 work, "The Nature of the Firm." He argued corporations were necessary because of what he called "transaction costs." It was simply too complicated and too costly to search for and find the right worker at the right moment for any given task, or to search for supplies, or to renegotiate prices, police performance and protect trade secrets in an open marketplace. The corporation might not be as good at allocating labor and capital as the marketplace; it made up for those weaknesses by reducing transaction costs.
Mr. Coase received his Nobel Prize in 1991—the very dawn of the Internet age. Since then, the ability of human beings on different continents and with vastly different skills and interests to work together and coordinate complex tasks has taken quantum leaps. Complicated enterprises, like maintaining Wikipedia or building a Linux operating system, now can be accomplished with little or no corporate management structure at all.
That's led some utopians, like Don Tapscott and Anthony Williams, authors of the book "Wikinomics," to predict the rise of "mass collaboration" as the new form of economic organization. They believe corporate hierarchies will disappear, as individuals are empowered to work together in creating "a new era, perhaps even a golden one, on par with the Italian renaissance or the rise of Athenian democracy."
That's heady stuff, and almost certainly exaggerated. Even the most starry-eyed techno-enthusiasts have a hard time imagining, say, a Boeing 787 built by "mass collaboration." Still, the trends here are big and undeniable. Change is rapidly accelerating. Transaction costs are rapidly diminishing. And as a result, everything we learned in the last century about managing large corporations is in need of a serious rethink. We have both a need and an opportunity to devise a new form of economic organization, and a new science of management, that can deal with the breakneck realities of 21st century change.
The strategy consultant Gary Hamel is a leading advocate for rethinking management. He's building a new, online management "laboratory" where leading management practitioners and thinkers can work together—a form of mass collaboration—on innovative ideas for handling modern management challenges.
What will the replacement for the corporation look like? Even Mr. Hamel doesn't have an answer for that one. "The thing that limits us," he admits, "is that we are extraordinarily familiar with the old model, but the new model, we haven't even seen yet."
This much, though, is clear: The new model will have to be more like the marketplace, and less like corporations of the past. It will need to be flexible, agile, able to quickly adjust to market developments, and ruthless in reallocating resources to new opportunities.
Resource allocation will be one of the biggest challenges. The beauty of markets is that, over time, they tend to ensure that both people and money end up employed in the highest-value enterprises. In corporations, decisions about allocating resources are made by people with a vested interest in the status quo. "The single biggest reason companies fail," says Mr. Hamel, "is that they overinvest in what is, as opposed to what might be."
This is the core of the innovator's dilemma. The big companies Mr. Christensen studied failed, not necessarily because they didn't see the coming innovations, but because they failed to adequately invest in those innovations. To avoid this problem, the people who control large pools of capital need to act more like venture capitalists, and less like corporate finance departments. They need to make lots of bets, not just a few big ones, and they need to be willing to cut their losses.
The resource allocation problem is one Google has tried to address with its "20%" policy. All engineers are allowed to spend 20% of their time working on Google-related projects other than those assigned to them. The company says this system has helped it develop innovative products, such as Google News. Because engineers don't have to compete for funds, the Google approach doesn't have the discipline of a true marketplace, and it hasn't yet proven itself as a way to generate incremental profits. But it does allow new ideas to get some attention.
In addition to resource allocation, there's the even bigger challenge of creating structures that motivate and inspire workers. There's plenty of evidence that most workers in today's complex organizations are simply not engaged in their work. Many are like Jim Halpert from "The Office," who in season one of the popular TV show declared: "This is just a job.…If this were my career, I'd have to throw myself in front of a train."
The new model will have to instill in workers the kind of drive and creativity and innovative spirit more commonly found among entrepreneurs. It will have to push power and decision-making down the organization as much as possible, rather than leave it concentrated at the top. Traditional bureaucratic structures will have to be replaced with something more like ad-hoc teams of peers, who come together to tackle individual projects, and then disband. SAS Institute Inc., the privately held software company in North Carolina that invests heavily in both research and development and in generous employee benefits, ranging from free on-site health care and elder care support to massages, is often cited as one company that could be paving the way. The company has nurtured a reputation as both a source of innovative products and a great place to work.
Information gathering also needs to be broader and more inclusive. Former Procter & Gamble CEO A.G. Lafley's demand that the company cull product ideas from outside the company, rather than developing them all from within, was a step in this direction. (It even has a website for submitting ideas.) The new model will have to go further. New mechanisms will have to be created for harnessing the "wisdom of crowds." Feedback loops will need to be built that allow products and services to constantly evolve in response to new information. Change, innovation, adaptability, all have to become orders of the day.
Can the 20th-century corporation evolve into this new, 21st-century organization? It won't be easy. The "innovator's dilemma" applies to management, as well as technology. But the time has come to find out. The old methods won't last much longer.
—Adapted from "The Wall Street Journal Essential Guide to Management" by Alan Murray. Copyright 2010 by Dow Jones & Co. Published by Harper Business, an imprint of HarperCollins Publishers.
Write to Alan Murray at Alan.Murray@wsj.com
Foto is van lfred P. Sloan of General Motors (Granger Collection)
Saturday, 21 August 2010
Bernanke is bang
Een deel van de grote rentedaling van de afgelopen weken is toe te schrijven aan het volgens intimi overlopen van Bernanke van het neutrale kamp naar het kamp van de duiven. Binnenkort krijgen de duiven versterking van de twee nieuwe (nog niet benoemde) stemgerechtigde leden.
Tot verbazing van de intimi had de FED vorige week besloten om de aflossende hypotheekpakketten weer terug te kopen. Dat is kwantitatieve verruiming en Bernanke c.s. hadden vooraf gezegd dat ze hierover nog niet gesproken hadden. Men verwachtte daarom hooguit een toespeling in de FED- verklaring dat er aan een of andere vorm van kwantitatieve verruiming gedacht zou woren zoals aflossende leningen terugkopen.
De FED straalde hierdoor uit veel pessimistischer te zijn geworden over het herstel van de Amerikaanse economie.
De afgelopen week liet Bernanke uitlekken in enkele stappen minder optimistisch te zijn geworden.
Verwacht Bernanke nu een recessie?
Nee, dat verwacht Blinder/ Rosenbaum van de Observatory Group beslist niet. Bernanke verwacht een groeiafzwakking tot beneden de potentiële groei die niet te lang duurt. Eind dit jaar verwacht hij al weer groeiherstel. Dat was een verrassing voor mij. Ik zie de opleving pas in het tweede kwartaal of derde 2011 komen.
Het probleem is dat de economische groei niet hoog genoeg meer is (en na het nieuwe groeiherstel zal worden) om de werkloosheid te doen dalen. Als de werkloosheid beneden 7% zou zijn, had Bernanke daar niet zo'n probleem van gemaakt. Maar bij een werkloosheid van 9,5% die bij ongewijzigd beleid echt met 100% kans niet beneden 9% komt, moet de FED iets doen. In Europa hoeft de ECB en de Bank of England alleen de inflatie in de gaten te houden, maar in Amerika moet de FED ook zorgen voor een niet te hoge werkloosheid.
Het is dus vrijwel zeker dat de komende kwartalen de groei in de VS niet hoog genoeg gaat zijn om de werkloosheid te doen dalen en tegelijkertijd dreigt de inflatie om te slaan in deflatie (geen echt hoge kans, maar groter dan de vorige keer in 2005/2006 toen Bernanke c.s. zich hier druk over maakten). Dat moet een zwembad aan monetaire financiering losmaken.
Alle registers van monetaire verruiming moetenn nu opengetrokken worden bij de FED. Het is bijna niet voor te stellen (voor de FED) hoe je te veel monetair zou kunnen stimuleren. De bezettingsgraad blijft heel erg zeker te laag en de economische groei is met slechts weinig kans boven gevaarlijke niveaus (6%+) te krijgen.
De FED moet er dus vol tegen aan, nu men de punch uit de huidige punchbowl niet voldoende drinkt. Dan maar andere liquiditeit.
Hoe groot gaat de kwantitatieve verruiming worden?
Mary Rosenbaum denkt dat de FED voor 1000 miljard staatsleningen gaat opkopen. Dat gebeurt niet in een aankondiging, maar in diverse stappen. De werkloosheidssituatie is zo nijpend geworden dat dit opkopen van staatsleningen wel een lieve duit mag kosten. De ECB intervenieert alleen maar met opkopen staatsleningen van PIGS-landen als de rente stijgt/ te hoog is, maar de FED koopt tegen elke prijs (net als de Bank of England deed). Men is wel benauwd voor verliezen, maar men ziet geen andere uitweg. Men kan geen consensus/overeestemming krijgen voor een andere, meer ingewikkelde strategie die de belastingbetaler minder gaat kosten.
Het enige dat de FED kan doen is gewone Amerikaanse staatsleningen kopen op een zo transparant mogelijke wijze: precies van te voren aankondigen hoe veel men per maand gaat kopen en in welke looptijden. Voor een andere oplossing kan men volgens Mary de handen niet op elkaar krijgen.
Als dat de strategie is die de FED gaat volgen die men afgelopen weken heeft laten uitlekken is het niet zo verwonderlijk dat de lange rente ging dalen. De lange rente daalt alleen als men weet dat tegen elke prijs lange leningen gekocht gaan worden door de overheid/Fed. Dát voor zijn is een winnende beleggingsstrategie, zo heeft PIMCO met verve verkondigd en profijtelijk uitgevoerd. Gewoon front running van te verwachten beleid levert goed geld op tegen weinig risico.
Maar het kopen van lange leningen is uiterst gevaarlijk op deze lage rentes. Dat gaat nog even goed, maar dan komt de man met de hamer. Als de groeiafzwakking echt maar zo kort duurt als Bernanke denkt, dan gaat men niet lang genoeg door met opkopen van staatsleningen tegen elke prijs en koopt het buitenland niet meer zo veel mee (nu doen ze dat wel omdat ze totaal in paniek zijn en geen enkel risico meer willen lopen, wat verandert als de groei weer aantrekt). Ook durven dan de banken die de kredietcrisis veroorzaakt hebben dan niet meer op zo'n grote schaal in te zetten dat de rente minder oploopt dan is ingeprijsd. Kortom, staatsleningen blijven uiterst enge beleggingspapiertjes. Het afgelopen jaar waren dat de papiertjes van de PIIGS (Portugal, Italië, Ierland, Griekenland en Spanje), in de toekomst dreigt at te gaan gelden voor alle staatsleningen, vooral de langlopende.
Is het wel zo zeker dat de FED alleen maar extra staatsleningen gaat kopen?
Mary had een overtuigend antwoord dat men zeker geen herfinanciering van hypotheken gaat afdwingen via de FED of overheid. Wie nu niet kan herfinancieren is gewoon een te groot risico voor de banken. De belastingbetaler zal moeten bijspringen als men dit afdwingt en dat wil men (met de Tea Party op de achtergrond) niet afdwingen. Het overtuigende van het antwoord van Mary zat in de spontane braakneigingen bij mensen die hierover gaan bij de FED als de herfinancieringsplannen van hypotheken ter sprake gebracht worden (het was overigens de nummer 1 vraag bij Mary c.s., moet de FED dat niet regelen, naar aanleiding van pleidooien hiervoor door Pimco en Morgan Stanley (inclusief de berekeningen dat de consument zo elk jaar $ 46 miljard + extra te besteden krijgt); het antwoord of men dit ging doen ontlokte zeer extreme reacties: dit plan uitvoeren is volstrekte nonsens, no way dat we dit ooit gaan doen etc.
Moet de FED dan het midden- en kleinbedrijf dan gaan financieren?
Dat is technisch haast niet haalbaar. Binnen de FED is dat te ingewikkeld. Daarom dus liever saaie veel te duren Treasuries (staatsleningen) kopen.
De FED had hier al een programma voor (TALF) waarbij banken bedrijfsleningen als onderpand kunnen geven. dat was helemaal geen succes en dat heeft het animo om dat weer op te pakken tot nul teruggebracht.
Gaat de FED securitisering weer nieuw leven inblazen?
Dat leeft nauwelijks bij de FED. Men heeft geen idee hoe dat zou moeten. Dat is jammer, want de kredietverstrekking na 2000 ging meer via securitisering dan via bankkredieten. Nu kredieten alleen van banken moet komen blijft dat zeer problematisch, zo lang securitisering nauwelijks van de grond komt. Pas als het bankkapitaal enorm is aangegroeid en de levarge flink is teruggebracht kunnen de banken het gat dat geallen is nu de zecuritisering voor meer dan 90% weg is op kunnen vullen.
Gaat die kwantitatieve verruiming meteen op grote schaal komen?
Men wil geen paniek zaaien (er is geen noodsituatie zoals bij het faillissement van Lehman Brothers) en wil eerst afwachten of de groei echt zo tegenvalt (ten slotte kan de vraag naar huizen en auto's zo maar flink aantrekken als het vertrouwen ook maar een beetje terugkomt en dan krijg je onmiddellijk voldoende groei).
Wanneer gaat men starten?
Misschien gaat Bernanke hier iets over loslaten bij de conferentie in Jackson Hole, maar waarschijnlijk niet. In september zou men al kunnen beginnen met de voorbereiding van een extra rondje staatsleningen kopen.
Wat gaat Bernanke op Jackson Hole conferentie vertellen?
Dat is vrij onduidelijk, maar waarschijnlijk gaat hij uitleggen dat hij iets moet doen omdat de werkloosheid te hoog is, ook al komt er geen recessie. De economische groei in het herstel is gewoon te laag om echte daling van de werkloosheid te krijgen. De economsiche groei moet gewoon hoger worden, vooral omdat er geen inflatie maar een deflatierisico is.
Eigen interpretatie: Bernanke gaat zeggen waarom FED kwantitatief moet stimuleren via opkopen staatsleningen. Omdat de economische groei in het vierde kwartaal van 2010 nog niet aantrekt, komt er dan een versnelling in de kwantitatieve aankopen.
N.B. Jackson Hole is de jaarlijkse conferentie waar centrale bankiers/ wetenschappers/ FED vorsers bij elkaar komen en waar vaak belangrijke verhalen verteld worden. Vorig jaar maakte Bernanke duidelijk dat de rente ) bleef ook als de werkloosheid zou dalen, zo lang het niveau van de werkloosheid te hoog was (en na 1% daling was die nog steeds te hoog)
Wat betekent dat voor de rente?
De rente kan op korte termijn omlaag, maar men koopt dan veel te duur, tegen bubbelprijzen. Er is enig risico dat China zal zeggen dat men minder staatsleningen gaat kopen. Het kan zelfs verkopen worden, omdat in de komende Amerikaanse verkiezingsstrijd China scherp zal worden aangevallen door politici om zieltjes te winnen. China kan dan een tegenzet doen om te laten zien dat protectionisme nog steeds een verliezende strategie is (een lesje dat de VS en Wilders weer moeten leren). an zal de renteflink stijgen.
Tot verbazing van de intimi had de FED vorige week besloten om de aflossende hypotheekpakketten weer terug te kopen. Dat is kwantitatieve verruiming en Bernanke c.s. hadden vooraf gezegd dat ze hierover nog niet gesproken hadden. Men verwachtte daarom hooguit een toespeling in de FED- verklaring dat er aan een of andere vorm van kwantitatieve verruiming gedacht zou woren zoals aflossende leningen terugkopen.
De FED straalde hierdoor uit veel pessimistischer te zijn geworden over het herstel van de Amerikaanse economie.
De afgelopen week liet Bernanke uitlekken in enkele stappen minder optimistisch te zijn geworden.
Verwacht Bernanke nu een recessie?
Nee, dat verwacht Blinder/ Rosenbaum van de Observatory Group beslist niet. Bernanke verwacht een groeiafzwakking tot beneden de potentiële groei die niet te lang duurt. Eind dit jaar verwacht hij al weer groeiherstel. Dat was een verrassing voor mij. Ik zie de opleving pas in het tweede kwartaal of derde 2011 komen.
Het probleem is dat de economische groei niet hoog genoeg meer is (en na het nieuwe groeiherstel zal worden) om de werkloosheid te doen dalen. Als de werkloosheid beneden 7% zou zijn, had Bernanke daar niet zo'n probleem van gemaakt. Maar bij een werkloosheid van 9,5% die bij ongewijzigd beleid echt met 100% kans niet beneden 9% komt, moet de FED iets doen. In Europa hoeft de ECB en de Bank of England alleen de inflatie in de gaten te houden, maar in Amerika moet de FED ook zorgen voor een niet te hoge werkloosheid.
Het is dus vrijwel zeker dat de komende kwartalen de groei in de VS niet hoog genoeg gaat zijn om de werkloosheid te doen dalen en tegelijkertijd dreigt de inflatie om te slaan in deflatie (geen echt hoge kans, maar groter dan de vorige keer in 2005/2006 toen Bernanke c.s. zich hier druk over maakten). Dat moet een zwembad aan monetaire financiering losmaken.
Alle registers van monetaire verruiming moetenn nu opengetrokken worden bij de FED. Het is bijna niet voor te stellen (voor de FED) hoe je te veel monetair zou kunnen stimuleren. De bezettingsgraad blijft heel erg zeker te laag en de economische groei is met slechts weinig kans boven gevaarlijke niveaus (6%+) te krijgen.
De FED moet er dus vol tegen aan, nu men de punch uit de huidige punchbowl niet voldoende drinkt. Dan maar andere liquiditeit.
Hoe groot gaat de kwantitatieve verruiming worden?
Mary Rosenbaum denkt dat de FED voor 1000 miljard staatsleningen gaat opkopen. Dat gebeurt niet in een aankondiging, maar in diverse stappen. De werkloosheidssituatie is zo nijpend geworden dat dit opkopen van staatsleningen wel een lieve duit mag kosten. De ECB intervenieert alleen maar met opkopen staatsleningen van PIGS-landen als de rente stijgt/ te hoog is, maar de FED koopt tegen elke prijs (net als de Bank of England deed). Men is wel benauwd voor verliezen, maar men ziet geen andere uitweg. Men kan geen consensus/overeestemming krijgen voor een andere, meer ingewikkelde strategie die de belastingbetaler minder gaat kosten.
Het enige dat de FED kan doen is gewone Amerikaanse staatsleningen kopen op een zo transparant mogelijke wijze: precies van te voren aankondigen hoe veel men per maand gaat kopen en in welke looptijden. Voor een andere oplossing kan men volgens Mary de handen niet op elkaar krijgen.
Als dat de strategie is die de FED gaat volgen die men afgelopen weken heeft laten uitlekken is het niet zo verwonderlijk dat de lange rente ging dalen. De lange rente daalt alleen als men weet dat tegen elke prijs lange leningen gekocht gaan worden door de overheid/Fed. Dát voor zijn is een winnende beleggingsstrategie, zo heeft PIMCO met verve verkondigd en profijtelijk uitgevoerd. Gewoon front running van te verwachten beleid levert goed geld op tegen weinig risico.
Maar het kopen van lange leningen is uiterst gevaarlijk op deze lage rentes. Dat gaat nog even goed, maar dan komt de man met de hamer. Als de groeiafzwakking echt maar zo kort duurt als Bernanke denkt, dan gaat men niet lang genoeg door met opkopen van staatsleningen tegen elke prijs en koopt het buitenland niet meer zo veel mee (nu doen ze dat wel omdat ze totaal in paniek zijn en geen enkel risico meer willen lopen, wat verandert als de groei weer aantrekt). Ook durven dan de banken die de kredietcrisis veroorzaakt hebben dan niet meer op zo'n grote schaal in te zetten dat de rente minder oploopt dan is ingeprijsd. Kortom, staatsleningen blijven uiterst enge beleggingspapiertjes. Het afgelopen jaar waren dat de papiertjes van de PIIGS (Portugal, Italië, Ierland, Griekenland en Spanje), in de toekomst dreigt at te gaan gelden voor alle staatsleningen, vooral de langlopende.
Is het wel zo zeker dat de FED alleen maar extra staatsleningen gaat kopen?
Mary had een overtuigend antwoord dat men zeker geen herfinanciering van hypotheken gaat afdwingen via de FED of overheid. Wie nu niet kan herfinancieren is gewoon een te groot risico voor de banken. De belastingbetaler zal moeten bijspringen als men dit afdwingt en dat wil men (met de Tea Party op de achtergrond) niet afdwingen. Het overtuigende van het antwoord van Mary zat in de spontane braakneigingen bij mensen die hierover gaan bij de FED als de herfinancieringsplannen van hypotheken ter sprake gebracht worden (het was overigens de nummer 1 vraag bij Mary c.s., moet de FED dat niet regelen, naar aanleiding van pleidooien hiervoor door Pimco en Morgan Stanley (inclusief de berekeningen dat de consument zo elk jaar $ 46 miljard + extra te besteden krijgt); het antwoord of men dit ging doen ontlokte zeer extreme reacties: dit plan uitvoeren is volstrekte nonsens, no way dat we dit ooit gaan doen etc.
Moet de FED dan het midden- en kleinbedrijf dan gaan financieren?
Dat is technisch haast niet haalbaar. Binnen de FED is dat te ingewikkeld. Daarom dus liever saaie veel te duren Treasuries (staatsleningen) kopen.
De FED had hier al een programma voor (TALF) waarbij banken bedrijfsleningen als onderpand kunnen geven. dat was helemaal geen succes en dat heeft het animo om dat weer op te pakken tot nul teruggebracht.
Gaat de FED securitisering weer nieuw leven inblazen?
Dat leeft nauwelijks bij de FED. Men heeft geen idee hoe dat zou moeten. Dat is jammer, want de kredietverstrekking na 2000 ging meer via securitisering dan via bankkredieten. Nu kredieten alleen van banken moet komen blijft dat zeer problematisch, zo lang securitisering nauwelijks van de grond komt. Pas als het bankkapitaal enorm is aangegroeid en de levarge flink is teruggebracht kunnen de banken het gat dat geallen is nu de zecuritisering voor meer dan 90% weg is op kunnen vullen.
Gaat die kwantitatieve verruiming meteen op grote schaal komen?
Men wil geen paniek zaaien (er is geen noodsituatie zoals bij het faillissement van Lehman Brothers) en wil eerst afwachten of de groei echt zo tegenvalt (ten slotte kan de vraag naar huizen en auto's zo maar flink aantrekken als het vertrouwen ook maar een beetje terugkomt en dan krijg je onmiddellijk voldoende groei).
Wanneer gaat men starten?
Misschien gaat Bernanke hier iets over loslaten bij de conferentie in Jackson Hole, maar waarschijnlijk niet. In september zou men al kunnen beginnen met de voorbereiding van een extra rondje staatsleningen kopen.
Wat gaat Bernanke op Jackson Hole conferentie vertellen?
Dat is vrij onduidelijk, maar waarschijnlijk gaat hij uitleggen dat hij iets moet doen omdat de werkloosheid te hoog is, ook al komt er geen recessie. De economische groei in het herstel is gewoon te laag om echte daling van de werkloosheid te krijgen. De economsiche groei moet gewoon hoger worden, vooral omdat er geen inflatie maar een deflatierisico is.
Eigen interpretatie: Bernanke gaat zeggen waarom FED kwantitatief moet stimuleren via opkopen staatsleningen. Omdat de economische groei in het vierde kwartaal van 2010 nog niet aantrekt, komt er dan een versnelling in de kwantitatieve aankopen.
N.B. Jackson Hole is de jaarlijkse conferentie waar centrale bankiers/ wetenschappers/ FED vorsers bij elkaar komen en waar vaak belangrijke verhalen verteld worden. Vorig jaar maakte Bernanke duidelijk dat de rente ) bleef ook als de werkloosheid zou dalen, zo lang het niveau van de werkloosheid te hoog was (en na 1% daling was die nog steeds te hoog)
Wat betekent dat voor de rente?
De rente kan op korte termijn omlaag, maar men koopt dan veel te duur, tegen bubbelprijzen. Er is enig risico dat China zal zeggen dat men minder staatsleningen gaat kopen. Het kan zelfs verkopen worden, omdat in de komende Amerikaanse verkiezingsstrijd China scherp zal worden aangevallen door politici om zieltjes te winnen. China kan dan een tegenzet doen om te laten zien dat protectionisme nog steeds een verliezende strategie is (een lesje dat de VS en Wilders weer moeten leren). an zal de renteflink stijgen.
Uncertainty changing investment landscape
By Richard Clarida and Mohamed El-Erian
Published: August 2 2010
Federal Reserve chairman Ben Bernanke’s characterisation of the economic outlook as “unusually uncertain” has attracted much attention, and rightly so. It speaks to the immediate impact of a series of ongoing national and global realignments whose effects are consequential but not yet sufficiently appreciated.
At a fundamental level, the unusual uncertainty reflects the disruptive combination of deleveraging, reregulation, structural unemployment, and other ongoing structural changes
The phenomenon is not limited to the US. It is also visible in other industrial countries. Just look at the latest inflation report issued by the Bank of England, which points to unusual dispersion in policymakers’ expectations for such basic economic variables as growth and inflation.
It is the shape of such dispersion that strikes us as particularly important. It seems that, wherever we look, the snapshot for “consensus expectations” has shifted: from traditional bell-shaped curves – with a high likelihood mean and thin tails (indicating most economists have similar expectations) – to a much flatter distribution of outcomes with fatter tails (where opinion is divided and expectations vary considerably).
We should all feel sorry for policymakers who face such distributions. The probability of a policy mistake is materially higher, especially as policy measures are subject to lags. What is less appreciated is the extent to which this changing shape of distributions affects conventional wisdom in the investment world, together with the rules of thumb that many investors have come to rely on.
We can think of five implications, some of which are already evident while others will only be obvious over time.
First, investing based on “mean reversion” will be less compelling. Even though flatter distributions with fatter tails have means, the constituency for mean reversion investing will shrink as those means will be much less often realised in practice. A world where the realised return rarely equals the expected valuation creates a bigger demand for liquid, default-free assets; it also lowers the demand for more volatile asset classes such as equities. These shifts are already taking place.
Second, frequent “risk on/risk off” fluctuations in investors’ sentiment are here to stay. Investors, based on 25 years of rules of thumb that “worked” during the great moderation, thought they knew more about the distribution of risk than they in fact did. This led to overconfidence during the bubble. The crisis reminded investors that these rules of thumb are less useful, if not dangerous.
With declining confidence in a reliable set of investing rules, markets have become more susceptible to overreactions to daily news and, are, therefore, more volatile. Just think of the number of triple-digit days in the Dow.
Moreover, because of the complex and broader involvement, real and perceived, of governments in the economy, separating policy signal from noise, and execution versus intent, has become as important as – but harder than – forecasting the macro data.
Third, tail hedging will become more important. An understandable consequence of the crisis is less trust in diversification as the sole mitigator for portfolio risk. We are already seeing increased investor interest in tail hedging, though the phenomenon is still limited to a small set of investors.
Fourth, historical benchmarks and correlations will be challenged. In this new “unusually uncertain” world, many investors will need to fundamentally rethink the design of benchmarks and the role of asset class correlations in implementing their investment strategies. The investment industry is yet to give sufficient attention to this.
Finally, less credit will be available to sustain leverage and high valuations. Even apart from the inevitable response to regulatory actions aimed at derisking banks, a world of flatter and fatter distributions will reduce available supply of leverage to finance trades and balance sheet expansion.
This is not just because extreme bad scenarios “melt down” positions but rarely “melt up”. Even with a balance among good and bad scenarios, the provider of leverage does not benefit from the fatter good tail, but faces greater likelihood of loss with the fatter bad tail.
Investors had 25 years to get comfortable with the great moderation. Its end poses challenges that extend well beyond policy circles as it fundamentally undermines the rules of thumb that served so many investors for so long. The sooner this is recognised, the better
Published: August 2 2010
Federal Reserve chairman Ben Bernanke’s characterisation of the economic outlook as “unusually uncertain” has attracted much attention, and rightly so. It speaks to the immediate impact of a series of ongoing national and global realignments whose effects are consequential but not yet sufficiently appreciated.
At a fundamental level, the unusual uncertainty reflects the disruptive combination of deleveraging, reregulation, structural unemployment, and other ongoing structural changes
The phenomenon is not limited to the US. It is also visible in other industrial countries. Just look at the latest inflation report issued by the Bank of England, which points to unusual dispersion in policymakers’ expectations for such basic economic variables as growth and inflation.
It is the shape of such dispersion that strikes us as particularly important. It seems that, wherever we look, the snapshot for “consensus expectations” has shifted: from traditional bell-shaped curves – with a high likelihood mean and thin tails (indicating most economists have similar expectations) – to a much flatter distribution of outcomes with fatter tails (where opinion is divided and expectations vary considerably).
We should all feel sorry for policymakers who face such distributions. The probability of a policy mistake is materially higher, especially as policy measures are subject to lags. What is less appreciated is the extent to which this changing shape of distributions affects conventional wisdom in the investment world, together with the rules of thumb that many investors have come to rely on.
We can think of five implications, some of which are already evident while others will only be obvious over time.
First, investing based on “mean reversion” will be less compelling. Even though flatter distributions with fatter tails have means, the constituency for mean reversion investing will shrink as those means will be much less often realised in practice. A world where the realised return rarely equals the expected valuation creates a bigger demand for liquid, default-free assets; it also lowers the demand for more volatile asset classes such as equities. These shifts are already taking place.
Second, frequent “risk on/risk off” fluctuations in investors’ sentiment are here to stay. Investors, based on 25 years of rules of thumb that “worked” during the great moderation, thought they knew more about the distribution of risk than they in fact did. This led to overconfidence during the bubble. The crisis reminded investors that these rules of thumb are less useful, if not dangerous.
With declining confidence in a reliable set of investing rules, markets have become more susceptible to overreactions to daily news and, are, therefore, more volatile. Just think of the number of triple-digit days in the Dow.
Moreover, because of the complex and broader involvement, real and perceived, of governments in the economy, separating policy signal from noise, and execution versus intent, has become as important as – but harder than – forecasting the macro data.
Third, tail hedging will become more important. An understandable consequence of the crisis is less trust in diversification as the sole mitigator for portfolio risk. We are already seeing increased investor interest in tail hedging, though the phenomenon is still limited to a small set of investors.
Fourth, historical benchmarks and correlations will be challenged. In this new “unusually uncertain” world, many investors will need to fundamentally rethink the design of benchmarks and the role of asset class correlations in implementing their investment strategies. The investment industry is yet to give sufficient attention to this.
Finally, less credit will be available to sustain leverage and high valuations. Even apart from the inevitable response to regulatory actions aimed at derisking banks, a world of flatter and fatter distributions will reduce available supply of leverage to finance trades and balance sheet expansion.
This is not just because extreme bad scenarios “melt down” positions but rarely “melt up”. Even with a balance among good and bad scenarios, the provider of leverage does not benefit from the fatter good tail, but faces greater likelihood of loss with the fatter bad tail.
Investors had 25 years to get comfortable with the great moderation. Its end poses challenges that extend well beyond policy circles as it fundamentally undermines the rules of thumb that served so many investors for so long. The sooner this is recognised, the better
montier mean reversion new normal
James Montier is a member of GMO’s asset allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. Mr. Montier is the author of several books including Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance; as well as Value Investing: Tools and Techniques for Intelligent Investment; and The Little Book of Behavioural Investing.
In between longer think pieces for GMO, James publishes at Behavioral Investing, which he describes as the “application of psychology to finance and the home of an investing skeptic.”
Enjoy:
~~~
Note: This was originally written for the FT, but they seem to have gone the same way as so much media and are dumbed down these days – they said it was too technical (after sitting on it for more than a week).
>
Reports of the death of mean reversion are premature
In a recent article [1] Richard Clarida and Mohamed El-Erian of PIMCO argued that the ‘New Normal’ offered at least five implications for portfolio management.
I. Investing based on mean reversion will be less compelling
II. Risk on/risk off fluctuations in sentiment will continue
III. Tail hedging becomes more important
IV. Historical benchmarks and correlations will be challenged
V. Less credit will be available to sustain leverage and high valuations
Implications IV and V seem pretty reasonable to me. However, reports of the death of mean reversion are premature. I fear that the authors are confusing the distribution of economic outcomes with the distribution of asset market returns. The distribution of economic outcomes may well turn out to be flatter, with fatter tails than we have previously experienced.
However, asset markets have long suffered such a distribution; it has proved no impediment to mean reversion based strategies. In fact, the fat tails of the asset market have provided the best opportunities for mean reversion strategies. For instance, in equity markets the fat tails associated with unpleasant outcomes (poor returns) have generally occurred as high (sometimes ludicrously high) valuations have returned towards their ‘normal’ level, and the fat tails which we all love (good returns) have occurred as low valuations have moved back towards more ‘normal’ levels.
As long as markets continue to follow the second implication (as they have done since time immemorial) and flip flop between irrational exuberance and the depths of despair, then mean reversion (at least in valuations) is likely to remain the best strategy for long-term investors. (This also highlights the apparently contradictory nature of the first two implications that the authors point out). We don’t require long periods of time at equilibrium for mean reversion strategies to work, rather (and considerably less onerously) we simply require markets to pass through the equilibrium periodically.
As always, investors need to be mindful of the context of their investment decisions. It is always possible that we are standing on the brink of a shift in the level to which asset valuations mean revert. But that has always been the case. Only careful thought and research can work to try to mitigate the dangers posed by this threat. After all, if investing were both simple and easy, everyone would be doing it.
The third implication that tail risk hedging will become more important is and always has been true (much like the second implication). The prudent investor should always pay attention to tail risk – the new normal doesn’t alter that.
Ever eager to please, the ‘engineers of innovation’ (or should that be the ‘architects of destruction’?) are happily creating products to serve the new bull market in tail risk. Deutsche Bank is launching a long equity volatility index, while Citi has come up with a tradeable crisis index (mixing equity and bond vols, swap spreads and structured credit spreads). Strangely enough, Bloomberg reports that PIMCO is planning a fund that will protect investors in the event of a decline greater than 15%. Even the CBOE is planning a new index based on the skew in the S&P 500.
However, any consideration of the purchase of insurance should not be divorced from a discussion of the price of the insurance. Cheap insurance is wonderful, and clearly benefits portfolios in terms of robustness. However, the key word is that the insurance must be cheap (or at very worst fair value). Buying expensive insurance is a waste of time. I used to live in Tokyo and was constantly amazed that the day after an earth tremor the cost of earthquake insurance would soar, as would the demand!
You should really only want insurance when it is cheap, as this is the time when no one else wants it, and (perversely) the events are most likely. Buying expensive insurance is just like buying any other overpriced asset … a path to the permanent impairment of capital. Rather than wasting money on expensive insurance, holding a larger cash balance makes sense. It preserves your dry powder for times when you want to deploy capital, and limits the downside.
So buy insurance when it’s cheap. When it isn’t and you are worried about the downside, hold cash. As Buffett said, holding cash is painful, but not as painful as doing something stupid!
In summary, the new normal may pose some issues for investors who have never bothered to study history (which is, of course, littered with many, many ‘new normals’). However, for those with perspective, prudence, patience and process, many of the same ‘eternal’ rules are likely to govern the game as they always have, come rain or shine. In essence, many of the implications are less the new normal, and more the old always!
In between longer think pieces for GMO, James publishes at Behavioral Investing, which he describes as the “application of psychology to finance and the home of an investing skeptic.”
Enjoy:
~~~
Note: This was originally written for the FT, but they seem to have gone the same way as so much media and are dumbed down these days – they said it was too technical (after sitting on it for more than a week).
>
Reports of the death of mean reversion are premature
In a recent article [1] Richard Clarida and Mohamed El-Erian of PIMCO argued that the ‘New Normal’ offered at least five implications for portfolio management.
I. Investing based on mean reversion will be less compelling
II. Risk on/risk off fluctuations in sentiment will continue
III. Tail hedging becomes more important
IV. Historical benchmarks and correlations will be challenged
V. Less credit will be available to sustain leverage and high valuations
Implications IV and V seem pretty reasonable to me. However, reports of the death of mean reversion are premature. I fear that the authors are confusing the distribution of economic outcomes with the distribution of asset market returns. The distribution of economic outcomes may well turn out to be flatter, with fatter tails than we have previously experienced.
However, asset markets have long suffered such a distribution; it has proved no impediment to mean reversion based strategies. In fact, the fat tails of the asset market have provided the best opportunities for mean reversion strategies. For instance, in equity markets the fat tails associated with unpleasant outcomes (poor returns) have generally occurred as high (sometimes ludicrously high) valuations have returned towards their ‘normal’ level, and the fat tails which we all love (good returns) have occurred as low valuations have moved back towards more ‘normal’ levels.
As long as markets continue to follow the second implication (as they have done since time immemorial) and flip flop between irrational exuberance and the depths of despair, then mean reversion (at least in valuations) is likely to remain the best strategy for long-term investors. (This also highlights the apparently contradictory nature of the first two implications that the authors point out). We don’t require long periods of time at equilibrium for mean reversion strategies to work, rather (and considerably less onerously) we simply require markets to pass through the equilibrium periodically.
As always, investors need to be mindful of the context of their investment decisions. It is always possible that we are standing on the brink of a shift in the level to which asset valuations mean revert. But that has always been the case. Only careful thought and research can work to try to mitigate the dangers posed by this threat. After all, if investing were both simple and easy, everyone would be doing it.
The third implication that tail risk hedging will become more important is and always has been true (much like the second implication). The prudent investor should always pay attention to tail risk – the new normal doesn’t alter that.
Ever eager to please, the ‘engineers of innovation’ (or should that be the ‘architects of destruction’?) are happily creating products to serve the new bull market in tail risk. Deutsche Bank is launching a long equity volatility index, while Citi has come up with a tradeable crisis index (mixing equity and bond vols, swap spreads and structured credit spreads). Strangely enough, Bloomberg reports that PIMCO is planning a fund that will protect investors in the event of a decline greater than 15%. Even the CBOE is planning a new index based on the skew in the S&P 500.
However, any consideration of the purchase of insurance should not be divorced from a discussion of the price of the insurance. Cheap insurance is wonderful, and clearly benefits portfolios in terms of robustness. However, the key word is that the insurance must be cheap (or at very worst fair value). Buying expensive insurance is a waste of time. I used to live in Tokyo and was constantly amazed that the day after an earth tremor the cost of earthquake insurance would soar, as would the demand!
You should really only want insurance when it is cheap, as this is the time when no one else wants it, and (perversely) the events are most likely. Buying expensive insurance is just like buying any other overpriced asset … a path to the permanent impairment of capital. Rather than wasting money on expensive insurance, holding a larger cash balance makes sense. It preserves your dry powder for times when you want to deploy capital, and limits the downside.
So buy insurance when it’s cheap. When it isn’t and you are worried about the downside, hold cash. As Buffett said, holding cash is painful, but not as painful as doing something stupid!
In summary, the new normal may pose some issues for investors who have never bothered to study history (which is, of course, littered with many, many ‘new normals’). However, for those with perspective, prudence, patience and process, many of the same ‘eternal’ rules are likely to govern the game as they always have, come rain or shine. In essence, many of the implications are less the new normal, and more the old always!
Friday, 20 August 2010
.What Is It About 20-Somethings?
Most e-mailed article in NYT August 19 2010
http://www.nytimes.com/2010/08/22/magazine/22Adulthood-t.html?pagewanted=1&_r=1&ref=homepage&src=me
Around 1904 (the massive study “Adolescence,” by G. Stanley Hall, ): invention of teenagers 12-18 years: young adolescents
lots of institutions were developed, children labour abolished, causing a longer period of dependency from parents
Around 2100: invention of young adults 18-30 year: the 20 somethings
Changing of 20-somethings: less get the 5 milestones before 30 (We’re in the thick of what one sociologist calls “the changing timetable for adulthood.” Sociologists traditionally define the “transition to adulthood” as marked by five milestones: completing school, leaving home, becoming financially independent, marrying and having a child. In 1960, 77 percent of women and 65 percent of men had, by the time they reached 30, passed all five milestones. Among 30-year-olds in 2000, according to data from the United States Census Bureau, fewer than half of the women and one-third of the men had done so. A Canadian study reported that a typical 30-year-old in 2001 had completed the same number of milestones as a 25-year-old in the early ’70s.
adolescence
Hall, the first president of Clark University — the same place, interestingly enough, where Arnett now teaches — described adolescence as a time of “storm and stress,” filled with emotional upheaval, sorrow and rebelliousness. He cited the “curve of despondency” that “starts at 11, rises steadily and rapidly till 15 . . . then falls steadily till 23,”
Why are so many people in their 20s taking so long to grow up?
This question pops up everywhere, underlying concerns about “failure to launch” and “boomerang kids.” Two new sitcoms feature grown children moving back in with their parents — “$#*! My Dad Says,” starring William Shatner as a divorced curmudgeon whose 20-something son can’t make it on his own as a blogger, and “Big Lake,” in which a financial whiz kid loses his Wall Street job and moves back home to rural Pennsylvania. A cover of The New Yorker last spring picked up on the zeitgeist: a young man hangs up his new Ph.D. in his boyhood bedroom, the cardboard box at his feet signaling his plans to move back home now that he’s officially overqualified for a job. In the doorway stand his parents, their expressions a mix of resignation, worry, annoyance and perplexity: how exactly did this happen?
It’s happening all over, in all sorts of families, not just young people moving back home but also young people taking longer to reach adulthood overall. It’s a development that predates the current economic doldrums, and no one knows yet what the impact will be — on the prospects of the young men and women; on the parents on whom so many of them depend; on society, built on the expectation of an orderly progression in which kids finish school, grow up, start careers, make a family and eventually retire to live on pensions supported by the next crop of kids who finish school, grow up, start careers, make a family and on and on. The traditional cycle seems to have gone off course, as young people remain untethered to romantic partners or to permanent homes, going back to school for lack of better options, traveling, avoiding commitments, competing ferociously for unpaid internships or temporary (and often grueling) Teach for America jobs, forestalling the beginning of adult life.
The 20s are a black box, and there is a lot of churning in there. One-third of people in their 20s move to a new residence every year. Forty percent move back home with their parents at least once. They go through an average of seven jobs in their 20s, more job changes than in any other stretch. Two-thirds spend at least some time living with a romantic partner without being married. And marriage occurs later than ever. The median age at first marriage in the early 1970s, when the baby boomers were young, was 21 for women and 23 for men; by 2009 it had climbed to 26 for women and 28 for men, five years in a little more than a generation.
We’re in the thick of what one sociologist calls “the changing timetable for adulthood.” Sociologists traditionally define the “transition to adulthood” as marked by five milestones: completing school, leaving home, becoming financially independent, marrying and having a child. In 1960, 77 percent of women and 65 percent of men had, by the time they reached 30, passed all five milestones. Among 30-year-olds in 2000, according to data from the United States Census Bureau, fewer than half of the women and one-third of the men had done so. A Canadian study reported that a typical 30-year-old in 2001 had completed the same number of milestones as a 25-year-old in the early ’70s.
The whole idea of milestones, of course, is something of an anachronism; it implies a lockstep march toward adulthood that is rare these days. Kids don’t shuffle along in unison on the road to maturity. They slouch toward adulthood at an uneven, highly individual pace. Some never achieve all five milestones, including those who are single or childless by choice, or unable to marry even if they wanted to because they’re gay. Others reach the milestones completely out of order, advancing professionally before committing to a monogamous relationship, having children young and marrying later, leaving school to go to work and returning to school long after becoming financially secure.
Even if some traditional milestones are never reached, one thing is clear: Getting to what we would generally call adulthood is happening later than ever. But why? That’s the subject of lively debate among policy makers and academics. To some, what we’re seeing is a transient epiphenomenon, the byproduct of cultural and economic forces. To others, the longer road to adulthood signifies something deep, durable and maybe better-suited to our neurological hard-wiring. What we’re seeing, they insist, is the dawning of a new life stage — a stage that all of us need to adjust to.
JEFFREY JENSEN ARNETT, a psychology professor at Clark University in Worcester, Mass., is leading the movement to view the 20s as a distinct life stage, which he calls “emerging adulthood.” He says what is happening now is analogous to what happened a century ago, when social and economic changes helped create adolescence — a stage we take for granted but one that had to be recognized by psychologists, accepted by society and accommodated by institutions that served the young. Similar changes at the turn of the 21st century have laid the groundwork for another new stage, Arnett says, between the age of 18 and the late 20s. Among the cultural changes he points to that have led to “emerging adulthood” are the need for more education to survive in an information-based economy; fewer entry-level jobs even after all that schooling; young people feeling less rush to marry because of the general acceptance of premarital sex, cohabitation and birth control; and young women feeling less rush to have babies given their wide range of career options and their access to assisted reproductive technology if they delay pregnancy beyond their most fertile years.
Just as adolescence has its particular psychological profile, Arnett says, so does emerging adulthood: identity exploration, instability, self-focus, feeling in-between and a rather poetic characteristic he calls “a sense of possibilities.” A few of these, especially identity exploration, are part of adolescence too, but they take on new depth and urgency in the 20s. The stakes are higher when people are approaching the age when options tend to close off and lifelong commitments must be made. Arnett calls it “the age 30 deadline.”
The issue of whether emerging adulthood is a new stage is being debated most forcefully among scholars, in particular psychologists and sociologists. But its resolution has broader implications. Just look at what happened for teenagers. It took some effort, a century ago, for psychologists to make the case that adolescence was a new developmental stage. Once that happened, social institutions were forced to adapt: education, health care, social services and the law all changed to address the particular needs of 12- to 18-year-olds. An understanding of the developmental profile of adolescence led, for instance, to the creation of junior high schools in the early 1900s, separating seventh and eighth graders from the younger children in what used to be called primary school. And it led to the recognition that teenagers between 14 and 18, even though they were legally minors, were mature enough to make their own choice of legal guardian in the event of their parents’ deaths. If emerging adulthood is an analogous stage, analogous changes are in the wings.
But what would it look like to extend some of the special status of adolescents to young people in their 20s? Our uncertainty about this question is reflected in our scattershot approach to markers of adulthood. People can vote at 18, but in some states they don’t age out of foster care until 21. They can join the military at 18, but they can’t drink until 21. They can drive at 16, but they can’t rent a car until 25 without some hefty surcharges. If they are full-time students, the Internal Revenue Service considers them dependents until 24; those without health insurance will soon be able to stay on their parents’ plans even if they’re not in school until age 26, or up to 30 in some states. Parents have no access to their child’s college records if the child is over 18, but parents’ income is taken into account when the child applies for financial aid up to age 24. We seem unable to agree when someone is old enough to take on adult responsibilities. But we’re pretty sure it’s not simply a matter of age.
If society decides to protect these young people or treat them differently from fully grown adults, how can we do this without becoming all the things that grown children resist — controlling, moralizing, paternalistic? Young people spend their lives lumped into age-related clusters — that’s the basis of K-12 schooling — but as they move through their 20s, they diverge. Some 25-year-olds are married homeowners with good jobs and a couple of kids; others are still living with their parents and working at transient jobs, or not working at all. Does that mean we extend some of the protections and special status of adolescence to all people in their 20s? To some of them? Which ones? Decisions like this matter, because failing to protect and support vulnerable young people can lead them down the wrong path at a critical moment, the one that can determine all subsequent paths. But overprotecting and oversupporting them can sometimes make matters worse, turning the “changing timetable of adulthood” into a self-fulfilling prophecy.
The more profound question behind the scholarly intrigue is the one that really captivates parents: whether the prolongation of this unsettled time of life is a good thing or a bad thing. With life spans stretching into the ninth decade, is it better for young people to experiment in their 20s before making choices they’ll have to live with for more than half a century? Or is adulthood now so malleable, with marriage and employment options constantly being reassessed, that young people would be better off just getting started on something, or else they’ll never catch up, consigned to remain always a few steps behind the early bloomers? Is emerging adulthood a rich and varied period for self-discovery, as Arnett says it is? Or is it just another term for self-indulgence?
THE DISCOVERY OF adolescence is generally dated to 1904, with the publication of the massive study “Adolescence,” by G. Stanley Hall, a prominent psychologist and first president of the American Psychological Association. Hall attributed the new stage to social changes at the turn of the 20th century. Child-labor laws kept children under 16 out of the work force, and universal education laws kept them in secondary school, thus prolonging the period of dependence — a dependence that allowed them to address psychological tasks they might have ignored when they took on adult roles straight out of childhood. Hall, the first president of Clark University — the same place, interestingly enough, where Arnett now teaches — described adolescence as a time of “storm and stress,” filled with emotional upheaval, sorrow and rebelliousness. He cited the “curve of despondency” that “starts at 11, rises steadily and rapidly till 15 . . . then falls steadily till 23,” and described other characteristics of adolescence, including an increase in sensation seeking, greater susceptibility to media influences (which in 1904 mostly meant “flash literature” and “penny dreadfuls”) and overreliance on peer relationships. Hall’s book was flawed, but it marked the beginning of the scientific study of adolescence and helped lead to its eventual acceptance as a distinct stage with its own challenges, behaviors and biological profile.
In the 1990s, Arnett began to suspect that something similar was taking place with young people in their late teens and early 20s. He was teaching human development and family studies at the University of Missouri, studying college-age students, both at the university and in the community around Columbia, Mo. He asked them questions about their lives and their expectations like, “Do you feel you have reached adulthood?”
“I was in my early- to mid-30s myself, and I remember thinking, They’re not a thing like me,” Arnett told me when we met last spring in Worcester. “I realized that there was something special going on.” The young people he spoke to weren’t experiencing the upending physical changes that accompany adolescence, but as an age cohort they did seem to have a psychological makeup different from that of people just a little bit younger or a little bit older. This was not how most psychologists were thinking about development at the time, when the eight-stage model of the psychologist Erik Erikson was in vogue. Erikson, one of the first to focus on psychological development past childhood, divided adulthood into three stages — young (roughly ages 20 to 45), middle (about ages 45 to 65) and late (all the rest) — and defined them by the challenges that individuals in a particular stage encounter and must resolve before moving on to the next stage. In young adulthood, according to his model, the primary psychological challenge is “intimacy versus isolation,” by which Erikson meant deciding whether to commit to a lifelong intimate relationship and choosing the person to commit to.
But Arnett said “young adulthood” was too broad a term to apply to a 25-year span that included both him and his college students. The 20s are something different from the 30s and 40s, he remembered thinking. And while he agreed that the struggle for intimacy was one task of this period, he said there were other critical tasks as well.
Arnett and I were discussing the evolution of his thinking over lunch at BABA Sushi, a quiet restaurant near his office where he goes so often he knows the sushi chefs by name. He is 53, very tall and wiry, with clipped steel-gray hair and ice-blue eyes, an intense, serious man. He describes himself as a late bloomer, a onetime emerging adult before anyone had given it a name. After graduating from Michigan State University in 1980, he spent two years playing guitar in bars and restaurants and experimented with girlfriends, drugs and general recklessness before going for his doctorate in developmental psychology at the University of Virginia. By 1986 he had his first academic job at Oglethorpe University, a small college in Atlanta. There he met his wife, Lene Jensen, the school’s smartest psych major, who stunned Arnett when she came to his office one day in 1989, shortly after she graduated, and asked him out on a date. Jensen earned a doctorate in psychology, too, and she also teaches at Clark. She and Arnett have 10-year-old twins, a boy and a girl.
Arnett spent time at Northwestern University and the University of Chicago before moving to the University of Missouri in 1992, beginning his study of young men and women in the college town of Columbia, gradually broadening his sample to include New Orleans, Los Angeles and San Francisco. He deliberately included working-class young people as well as those who were well off, those who had never gone to college as well as those who were still in school, those who were supporting themselves as well as those whose bills were being paid by their parents. A little more than half of his sample was white, 18 percent African-American, 16 percent Asian-American and 14 percent Latino.
More than 300 interviews and 250 survey responses persuaded Arnett that he was onto something new. This was the era of the Gen X slacker, but Arnett felt that his findings applied beyond one generation. He wrote them up in 2000 in American Psychologist, the first time he laid out his theory of “emerging adulthood.” According to Google Scholar, which keeps track of such things, the article has been cited in professional books and journals roughly 1,700 times. This makes it, in the world of academia, practically viral. At the very least, the citations indicate that Arnett had come up with a useful term for describing a particular cohort; at best, that he offered a whole new way of thinking about them.
DURING THE PERIOD he calls emerging adulthood, Arnett says that young men and women are more self-focused than at any other time of life, less certain about the future and yet also more optimistic, no matter what their economic background. This is where the “sense of possibilities” comes in, he says; they have not yet tempered their idealistic visions of what awaits. “The dreary, dead-end jobs, the bitter divorces, the disappointing and disrespectful children . . . none of them imagine that this is what the future holds for them,” he wrote. Ask them if they agree with the statement “I am very sure that someday I will get to where I want to be in life,” and 96 percent of them will say yes. But despite elements that are exciting, even exhilarating, about being this age, there is a downside, too: dread, frustration, uncertainty, a sense of not quite understanding the rules of the game. More than positive or negative feelings, what Arnett heard most often was ambivalence — beginning with his finding that 60 percent of his subjects told him they felt like both grown-ups and not-quite-grown-ups.
Some scientists would argue that this ambivalence reflects what is going on in the brain, which is also both grown-up and not-quite-grown-up. Neuroscientists once thought the brain stops growing shortly after puberty, but now they know it keeps maturing well into the 20s. This new understanding comes largely from a longitudinal study of brain development sponsored by the National Institute of Mental Health, which started following nearly 5,000 children at ages 3 to 16 (the average age at enrollment was about 10). The scientists found the children’s brains were not fully mature until at least 25. “In retrospect I wouldn’t call it shocking, but it was at the time,” Jay Giedd, the director of the study, told me. “The only people who got this right were the car-rental companies.”
When the N.I.M.H. study began in 1991, Giedd said he and his colleagues expected to stop when the subjects turned 16. “We figured that by 16 their bodies were pretty big physically,” he said. But every time the children returned, their brains were found still to be changing. The scientists extended the end date of the study to age 18, then 20, then 22. The subjects’ brains were still changing even then. Tellingly, the most significant changes took place in the prefrontal cortex and cerebellum, the regions involved in emotional control and higher-order cognitive function.
As the brain matures, one thing that happens is the pruning of the synapses. Synaptic pruning does not occur willy-nilly; it depends largely on how any one brain pathway is used. By cutting off unused pathways, the brain eventually settles into a structure that’s most efficient for the owner of that brain, creating well-worn grooves for the pathways that person uses most. Synaptic pruning intensifies after rapid brain-cell proliferation during childhood and again in the period that encompasses adolescence and the 20s. It is the mechanism of “use it or lose it”: the brains we have are shaped largely in response to the demands made of them.
We have come to accept the idea that environmental influences in the first three years of life have long-term consequences for cognition, emotional control, attention and the like. Is it time to place a similar emphasis, with hopes for a similar outcome, on enriching the cognitive environment of people in their 20s?
N.I.M.H. scientists also found a time lag between the growth of the limbic system, where emotions originate, and of the prefrontal cortex, which manages those emotions. The limbic system explodes during puberty, but the prefrontal cortex keeps maturing for another 10 years. Giedd said it is logical to suppose — and for now, neuroscientists have to make a lot of logical suppositions — that when the limbic system is fully active but the cortex is still being built, emotions might outweigh rationality. “The prefrontal part is the part that allows you to control your impulses, come up with a long-range strategy, answer the question ‘What am I going to do with my life?’ ” he told me. “That weighing of the future keeps changing into the 20s and 30s.”
Among study subjects who enrolled as children, M.R.I. scans have been done so far only to age 25, so scientists have to make another logical supposition about what happens to the brain in the late 20s, the 30s and beyond. Is it possible that the brain just keeps changing and pruning, for years and years? “Guessing from the shape of the growth curves we have,” Giedd’s colleague Philip Shaw wrote in an e-mail message, “it does seem that much of the gray matter,” where synaptic pruning takes place, “seems to have completed its most dramatic structural change” by age 25. For white matter, where insulation that helps impulses travel faster continues to form, “it does look as if the curves are still going up, suggesting continued growth” after age 25, he wrote, though at a slower rate than before.
None of this is new, of course; the brains of young people have always been works in progress, even when we didn’t have sophisticated scanning machinery to chart it precisely. Why, then, is the youthful brain only now arising as an explanation for why people in their 20s are seeming a bit unfinished? Maybe there’s an analogy to be found in the hierarchy of needs, a theory put forth in the 1940s by the psychologist Abraham Maslow. According to Maslow, people can pursue more elevated goals only after their basic needs of food, shelter and sex have been met. What if the brain has its own hierarchy of needs? When people are forced to adopt adult responsibilities early, maybe they just do what they have to do, whether or not their brains are ready. Maybe it’s only now, when young people are allowed to forestall adult obligations without fear of public censure, that the rate of societal maturation can finally fall into better sync with the maturation of the brain.
Cultural expectations might also reinforce the delay. The “changing timetable for adulthood” has, in many ways, become internalized by 20-somethings and their parents alike. Today young people don’t expect to marry until their late 20s, don’t expect to start a family until their 30s, don’t expect to be on track for a rewarding career until much later than their parents were. So they make decisions about their futures that reflect this wider time horizon. Many of them would not be ready to take on the trappings of adulthood any earlier even if the opportunity arose; they haven’t braced themselves for it.
Nor do parents expect their children to grow up right away — and they might not even want them to. Parents might regret having themselves jumped into marriage or a career and hope for more considered choices for their children. Or they might want to hold on to a reassuring connection with their children as the kids leave home. If they were “helicopter parents” — a term that describes heavily invested parents who hover over their children, swooping down to take charge and solve problems at a moment’s notice — they might keep hovering and problem-solving long past the time when their children should be solving problems on their own. This might, in a strange way, be part of what keeps their grown children in the limbo between adolescence and adulthood. It can be hard sometimes to tease out to what extent a child doesn’t quite want to grow up and to what extent a parent doesn’t quite want to let go.
IT IS A BIG DEAL IN developmental psychology to declare the existence of a new stage of life, and Arnett has devoted the past 10 years to making his case. Shortly after his American Psychologist article appeared in 2000, he and Jennifer Lynn Tanner, a developmental psychologist at Rutgers University, convened the first conference of what they later called the Society for the Study of Emerging Adulthood. It was held in 2003 at Harvard with an attendance of 75; there have been three more since then, and last year’s conference, in Atlanta, had more than 270 attendees. In 2004 Arnett published a book, “Emerging Adulthood: The Winding Road From the Late Teens Through the Twenties,” which is still in print and selling well. In 2006 he and Tanner published an edited volume, “Emerging Adults in America: Coming of Age in the 21st Century,” aimed at professionals and academics. Arnett’s college textbook, “Adolescence and Emerging Adulthood: A Cultural Approach,” has been in print since 2000 and is now in its fourth edition. Next year he says he hopes to publish another book, this one for the parents of 20-somethings.
If all Arnett’s talk about emerging adulthood sounds vaguely familiar . . . well, it should. Forty years ago, an article appeared in The American Scholar that declared “a new stage of life” for the period between adolescence and young adulthood. This was 1970, when the oldest members of the baby boom generation — the parents of today’s 20-somethings — were 24. Young people of the day “can’t seem to ‘settle down,’ ” wrote the Yale psychologist Kenneth Keniston. He called the new stage of life “youth.”
Keniston’s description of “youth” presages Arnett’s description of “emerging adulthood” a generation later. In the late ’60s, Keniston wrote that there was “a growing minority of post-adolescents [who] have not settled the questions whose answers once defined adulthood: questions of relationship to the existing society, questions of vocation, questions of social role and lifestyle.” Whereas once, such aimlessness was seen only in the “unusually creative or unusually disturbed,” he wrote, it was becoming more common and more ordinary in the baby boomers of 1970. Among the salient characteristics of “youth,” Keniston wrote, were “pervasive ambivalence toward self and society,” “the feeling of absolute freedom, of living in a world of pure possibilities” and “the enormous value placed upon change, transformation and movement” — all characteristics that Arnett now ascribes to “emerging adults.”
Arnett readily acknowledges his debt to Keniston; he mentions him in almost everything he has written about emerging adulthood. But he considers the ’60s a unique moment, when young people were rebellious and alienated in a way they’ve never been before or since. And Keniston’s views never quite took off, Arnett says, because “youth” wasn’t a very good name for it. He has called the label “ambiguous and confusing,” not nearly as catchy as his own “emerging adulthood.”
For whatever reason Keniston’s terminology faded away, it’s revealing to read his old article and hear echoes of what’s going on with kids today. He was describing the parents of today’s young people when they themselves were young — and amazingly, they weren’t all that different from their own children now. Keniston’s article seems a lovely demonstration of the eternal cycle of life, the perennial conflict between the generations, the gradual resolution of those conflicts. It’s reassuring, actually, to think of it as recursive, to imagine that there must always be a cohort of 20-somethings who take their time settling down, just as there must always be a cohort of 50-somethings who worry about it.
KENISTON CALLED IT youth, Arnett calls it emerging adulthood; whatever it’s called, the delayed transition has been observed for years. But it can be in fullest flower only when the young person has some other, nontraditional means of support — which would seem to make the delay something of a luxury item. That’s the impression you get reading Arnett’s case histories in his books and articles, or the essays in “20 Something Manifesto,” an anthology edited by a Los Angeles writer named Christine Hassler. “It’s somewhat terrifying,” writes a 25-year-old named Jennifer, “to think about all the things I’m supposed to be doing in order to ‘get somewhere’ successful: ‘Follow your passions, live your dreams, take risks, network with the right people, find mentors, be financially responsible, volunteer, work, think about or go to grad school, fall in love and maintain personal well-being, mental health and nutrition.’ When is there time to just be and enjoy?” Adds a 24-year-old from Virginia: “There is pressure to make decisions that will form the foundation for the rest of your life in your 20s. It’s almost as if having a range of limited options would be easier.”
While the complaints of these young people are heartfelt, they are also the complaints of the privileged. Julie, a 23-year-old New Yorker and contributor to “20 Something Manifesto,” is apparently aware of this. She was coddled her whole life, treated to French horn lessons and summer camp, told she could do anything. “It is a double-edged sword,” she writes, “because on the one hand I am so blessed with my experiences and endless options, but on the other hand, I still feel like a child. I feel like my job isn’t real because I am not where my parents were at my age. Walking home, in the shoes my father bought me, I still feel I have yet to grow up.”
Despite these impressions, Arnett insists that emerging adulthood is not limited to young persons of privilege and that it is not simply a period of self-indulgence. He takes pains in “Emerging Adulthood” to describe some case histories of young men and women from hard-luck backgrounds who use the self-focus and identity exploration of their 20s to transform their lives.
One of these is the case history of Nicole, a 25-year-old African-American who grew up in a housing project in Oakland, Calif. At age 6, Nicole, the eldest, was forced to take control of the household after her mother’s mental collapse. By 8, she was sweeping stores and baby-sitting for money to help keep her three siblings fed and housed. “I made a couple bucks and helped my mother out, helped my family out,” she told Arnett. She managed to graduate from high school, but with low grades, and got a job as a receptionist at a dermatology clinic. She moved into her own apartment, took night classes at community college and started to excel. “I needed to experience living out of my mother’s home in order to study,” she said.
In his book, Arnett presents Nicole as a symbol of all the young people from impoverished backgrounds for whom “emerging adulthood represents an opportunity — maybe a last opportunity — to turn one’s life around.” This is the stage where someone like Nicole can escape an abusive or dysfunctional family and finally pursue her own dreams. Nicole’s dreams are powerful — one course away from an associate degree, she plans to go on for a bachelor’s and then a Ph.D. in psychology — but she has not really left her family behind; few people do. She is still supporting her mother and siblings, which is why she works full time even though her progress through school would be quicker if she found a part-time job. Is it only a grim pessimist like me who sees how many roadblocks there will be on the way to achieving those dreams and who wonders what kind of freewheeling emerging adulthood she is supposed to be having?
Of course, Nicole’s case is not representative of society as a whole. And many parents — including those who can’t really afford it — continue to help their kids financially long past the time they expected to. Two years ago Karen Fingerman, a developmental psychologist at Purdue University, asked parents of grown children whether they provided significant assistance to their sons or daughters. Assistance included giving their children money or help with everyday tasks (practical assistance) as well as advice, companionship and an attentive ear. Eighty-six percent said they had provided advice in the previous month; less than half had done so in 1988. Two out of three parents had given a son or daughter practical assistance in the previous month; in 1988, only one in three had.
Fingerman took solace in her findings; she said it showed that parents stay connected to their grown children, and she suspects that both parties get something out of it. The survey questions, after all, referred not only to dispensing money but also to offering advice, comfort and friendship. And another of Fingerman’s studies suggests that parents’ sense of well-being depends largely on how close they are to their grown children and how their children are faring — objective support for the adage that you’re only as happy as your unhappiest child. But the expectation that young men and women won’t quite be able to make ends meet on their own, and that parents should be the ones to help bridge the gap, places a terrible burden on parents who might be worrying about their own job security, trying to care for their aging parents or grieving as their retirement plans become more and more of a pipe dream.
This dependence on Mom and Dad also means that during the 20s the rift between rich and poor becomes entrenched. According to data gathered by the Network on Transitions to Adulthood, a research consortium supported by the John D. and Catherine T. MacArthur Foundation, American parents give an average of 10 percent of their income to their 18- to 21-year-old children. This percentage is basically the same no matter the family’s total income, meaning that upper-class kids tend to get more than working-class ones. And wealthier kids have other, less obvious, advantages. When they go to four-year colleges or universities, they get supervised dormitory housing, health care and alumni networks not available at community colleges. And they often get a leg up on their careers by using parents’ contacts to help land an entry-level job — or by using parents as a financial backup when they want to take an interesting internship that doesn’t pay.
“You get on a pathway, and pathways have momentum,” Jennifer Lynn Tanner of Rutgers told me. “In emerging adulthood, if you spend this time exploring and you get yourself on a pathway that really fits you, then there’s going to be this snowball effect of finding the right fit, the right partner, the right job, the right place to live. The less you have at first, the less you’re going to get this positive effect compounded over time. You’re not going to have the same acceleration.”
EVEN ARNETT ADMITS that not every young person goes through a period of “emerging adulthood.” It’s rare in the developing world, he says, where people have to grow up fast, and it’s often skipped in the industrialized world by the people who marry early, by teenage mothers forced to grow up, by young men or women who go straight from high school to whatever job is available without a chance to dabble until they find the perfect fit. Indeed, the majority of humankind would seem to not go through it at all. The fact that emerging adulthood is not universal is one of the strongest arguments against Arnett’s claim that it is a new developmental stage. If emerging adulthood is so important, why is it even possible to skip it?
“The core idea of classical stage theory is that all people — underscore ‘all’ — pass through a series of qualitatively different periods in an invariant and universal sequence in stages that can’t be skipped or reordered,” Richard Lerner, Bergstrom chairman in applied developmental science at Tufts University, told me. Lerner is a close personal friend of Arnett’s; he and his wife, Jacqueline, who is also a psychologist, live 20 miles from Worcester, and they have dinner with Arnett and his wife on a regular basis.
“I think the world of Jeff Arnett,” Lerner said. “I think he is a smart, passionate person who is doing great work — not only a smart and productive scholar, but one of the nicest people I ever met in my life.”
No matter how much he likes and admires Arnett, however, Lerner says his friend has ignored some of the basic tenets of developmental psychology. According to classical stage theory, he told me, “you must develop what you’re supposed to develop when you’re supposed to develop it or you’ll never adequately develop it.”
When I asked Arnett what happens to people who don’t have an emerging adulthood, he said it wasn’t necessarily a big deal. They might face its developmental tasks — identity exploration, self-focus, experimentation in love, work and worldview — at a later time, maybe as a midlife crisis, or they might never face them at all, he said. It depends partly on why they missed emerging adulthood in the first place, whether it was by circumstance or by choice.
No, said Lerner, that’s not the way it works. To qualify as a developmental stage, emerging adulthood must be both universal and essential. “If you don’t develop a skill at the right stage, you’ll be working the rest of your life to develop it when you should be moving on,” he said. “The rest of your development will be unfavorably altered.” The fact that Arnett can be so casual about the heterogeneity of emerging adulthood and its existence in some cultures but not in others — indeed, even in some people but not in their neighbors or friends — is what undermines, for many scholars, his insistence that it’s a new life stage.
Why does it matter? Because if the delay in achieving adulthood is just a temporary aberration caused by passing social mores and economic gloom, it’s something to struggle through for now, maybe feeling a little sorry for the young people who had the misfortune to come of age in a recession. But if it’s a true life stage, we need to start rethinking our definition of normal development and to create systems of education, health care and social supports that take the new stage into account.
The Network on Transitions to Adulthood has been issuing reports about young people since it was formed in 1999 and often ends up recommending more support for 20-somethings. But more of what, exactly? There aren’t institutions set up to serve people in this specific age range; social services from a developmental perspective tend to disappear after adolescence. But it’s possible to envision some that might address the restlessness and mobility that Arnett says are typical at this stage and that might make the experimentation of “emerging adulthood” available to more young people. How about expanding programs like City Year, in which 17- to 24-year-olds from diverse backgrounds spend a year mentoring inner-city children in exchange for a stipend, health insurance, child care, cellphone service and a $5,350 education award? Or a federal program in which a government-sponsored savings account is created for every newborn, to be cashed in at age 21 to support a year’s worth of travel, education or volunteer work — a version of the “baby bonds” program that Hillary Clinton mentioned during her 2008 primary campaign? Maybe we can encourage a kind of socially sanctioned “rumspringa,” the temporary moratorium from social responsibilities some Amish offer their young people to allow them to experiment before settling down. It requires only a bit of ingenuity — as well as some societal forbearance and financial commitment — to think of ways to expand some of the programs that now work so well for the elite, like the Fulbright fellowship or the Peace Corps, to make the chance for temporary service and self-examination available to a wider range of young people.
A century ago, it was helpful to start thinking of adolescents as engaged in the work of growing up rather than as merely lazy or rebellious. Only then could society recognize that the educational, medical, mental-health and social-service needs of this group were unique and that investing in them would have a payoff in the future. Twenty-somethings are engaged in work, too, even if it looks as if they are aimless or failing to pull their weight, Arnett says. But it’s a reflection of our collective attitude toward this period that we devote so few resources to keeping them solvent and granting them some measure of security.
THE KIND OF SERVICES that might be created if emerging adulthood is accepted as a life stage can be seen during a visit to Yellowbrick, a residential program in Evanston, Ill., that calls itself the only psychiatric treatment facility for emerging adults. “Emerging adults really do have unique developmental tasks to focus on,” said Jesse Viner, Yellowbrick’s executive medical director. Viner started Yellowbrick in 2005, when he was working in a group psychiatric practice in Chicago and saw the need for a different way to treat this cohort. He is a soft-spoken man who looks like an accountant and sounds like a New Age prophet, peppering his conversation with phrases like “helping to empower their agency.”
“Agency” is a tricky concept when parents are paying the full cost of Yellowbrick’s comprehensive residential program, which comes to $21,000 a month and is not always covered by insurance. Staff members are aware of the paradox of encouraging a child to separate from Mommy and Daddy when it’s on their dime. They address it with a concept they call connected autonomy, which they define as knowing when to stand alone and when to accept help.
Patients come to Yellowbrick with a variety of problems: substance abuse, eating disorders, depression, anxiety or one of the more severe mental illnesses, like schizophrenia or bipolar disorder, that tend to appear in the late teens or early 20s. The demands of imminent independence can worsen mental-health problems or can create new ones for people who have managed up to that point to perform all the expected roles — son or daughter, boyfriend or girlfriend, student, teammate, friend — but get lost when schooling ends and expected roles disappear. That’s what happened to one patient who had done well at a top Ivy League college until the last class of the last semester of his last year, when he finished his final paper and could not bring himself to turn it in.
The Yellowbrick philosophy is that young people must meet these challenges without coddling or rescue. Up to 16 patients at a time are housed in the Yellowbrick residence, a four-story apartment building Viner owns. They live in the apartments — which are large, sunny and lavishly furnished — in groups of three or four, with staff members always on hand to teach the basics of shopping, cooking, cleaning, scheduling, making commitments and showing up.
Viner let me sit in on daily clinical rounds, scheduled that day for C., a young woman who had been at Yellowbrick for three months. Rounds are like the world’s most grueling job interview: the patient sits in front alongside her clinician “advocate,” and a dozen or so staff members are arrayed on couches and armchairs around the room, firing questions. C. seemed nervous but pleased with herself, frequently flashing a huge white smile. She is 22, tall and skinny, and she wore tiny denim shorts and a big T-shirt and vest. She started to fall apart during her junior year at college, plagued by binge drinking and anorexia, and in her first weeks at Yellowbrick her alcohol abuse continued. Most psychiatric facilities would have kicked her out after the first relapse, said Dale Monroe-Cook, Yellowbrick’s vice president of clinical operations. “We’re doing the opposite: we want the behavior to unfold, and we want to be there in that critical moment, to work with that behavior and help the emerging adult transition to greater independence.”
The Yellowbrick staff let C. face her demons and decide how to deal with them. After five relapses, C. asked the staff to take away her ID so she couldn’t buy alcohol. Eventually she decided to start going to meetings of Alcoholics Anonymous.
At her rounds in June, C. was able to report that she had been alcohol-free for 30 days. Jesse Viner’s wife, Laura Viner, who is a psychologist on staff, started to clap for her, but no one else joined in. “We’re on eggshells here,” Gary Zurawski, a clinical social worker specializing in substance abuse, confessed to C. “We don’t know if we should congratulate you too much.” The staff was sensitive about taking away the young woman’s motivation to improve her life for her own sake, not for the sake of getting praise from someone else.
C. took the discussion about the applause in stride and told the staff she had more good news: in two days she was going to graduate. On time.
THE 20S ARE LIKE the stem cell of human development, the pluripotent moment when any of several outcomes is possible. Decisions and actions during this time have lasting ramifications. The 20s are when most people accumulate almost all of their formal education; when most people meet their future spouses and the friends they will keep; when most people start on the careers that they will stay with for many years. This is when adventures, experiments, travels, relationships are embarked on with an abandon that probably will not happen again.
Does that mean it’s a good thing to let 20-somethings meander — or even to encourage them to meander — before they settle down? That’s the question that plagues so many of their parents. It’s easy to see the advantages to the delay. There is time enough for adulthood and its attendant obligations; maybe if kids take longer to choose their mates and their careers, they’ll make fewer mistakes and live happier lives. But it’s just as easy to see the drawbacks. As the settling-down sputters along for the “emerging adults,” things can get precarious for the rest of us. Parents are helping pay bills they never counted on paying, and social institutions are missing out on young people contributing to productivity and growth. Of course, the recession complicates things, and even if every 20-something were ready to skip the “emerging” moratorium and act like a grown-up, there wouldn’t necessarily be jobs for them all. So we’re caught in a weird moment, unsure whether to allow young people to keep exploring and questioning or to cut them off and tell them just to find something, anything, to put food on the table and get on with their lives.
Arnett would like to see us choose a middle course. “To be a young American today is to experience both excitement and uncertainty, wide-open possibility and confusion, new freedoms and new fears,” he writes in “Emerging Adulthood.” During the timeout they are granted from nonstop, often tedious and dispiriting responsibilities, “emerging adults develop skills for daily living, gain a better understanding of who they are and what they want from life and begin to build a foundation for their adult lives.” If it really works that way, if this longer road to adulthood really leads to more insight and better choices, then Arnett’s vision of an insightful, sensitive, thoughtful, content, well-honed, self-actualizing crop of grown-ups would indeed be something worth waiting for.
http://www.nytimes.com/2010/08/22/magazine/22Adulthood-t.html?pagewanted=1&_r=1&ref=homepage&src=me
Around 1904 (the massive study “Adolescence,” by G. Stanley Hall, ): invention of teenagers 12-18 years: young adolescents
lots of institutions were developed, children labour abolished, causing a longer period of dependency from parents
Around 2100: invention of young adults 18-30 year: the 20 somethings
Changing of 20-somethings: less get the 5 milestones before 30 (We’re in the thick of what one sociologist calls “the changing timetable for adulthood.” Sociologists traditionally define the “transition to adulthood” as marked by five milestones: completing school, leaving home, becoming financially independent, marrying and having a child. In 1960, 77 percent of women and 65 percent of men had, by the time they reached 30, passed all five milestones. Among 30-year-olds in 2000, according to data from the United States Census Bureau, fewer than half of the women and one-third of the men had done so. A Canadian study reported that a typical 30-year-old in 2001 had completed the same number of milestones as a 25-year-old in the early ’70s.
adolescence
Hall, the first president of Clark University — the same place, interestingly enough, where Arnett now teaches — described adolescence as a time of “storm and stress,” filled with emotional upheaval, sorrow and rebelliousness. He cited the “curve of despondency” that “starts at 11, rises steadily and rapidly till 15 . . . then falls steadily till 23,”
Why are so many people in their 20s taking so long to grow up?
This question pops up everywhere, underlying concerns about “failure to launch” and “boomerang kids.” Two new sitcoms feature grown children moving back in with their parents — “$#*! My Dad Says,” starring William Shatner as a divorced curmudgeon whose 20-something son can’t make it on his own as a blogger, and “Big Lake,” in which a financial whiz kid loses his Wall Street job and moves back home to rural Pennsylvania. A cover of The New Yorker last spring picked up on the zeitgeist: a young man hangs up his new Ph.D. in his boyhood bedroom, the cardboard box at his feet signaling his plans to move back home now that he’s officially overqualified for a job. In the doorway stand his parents, their expressions a mix of resignation, worry, annoyance and perplexity: how exactly did this happen?
It’s happening all over, in all sorts of families, not just young people moving back home but also young people taking longer to reach adulthood overall. It’s a development that predates the current economic doldrums, and no one knows yet what the impact will be — on the prospects of the young men and women; on the parents on whom so many of them depend; on society, built on the expectation of an orderly progression in which kids finish school, grow up, start careers, make a family and eventually retire to live on pensions supported by the next crop of kids who finish school, grow up, start careers, make a family and on and on. The traditional cycle seems to have gone off course, as young people remain untethered to romantic partners or to permanent homes, going back to school for lack of better options, traveling, avoiding commitments, competing ferociously for unpaid internships or temporary (and often grueling) Teach for America jobs, forestalling the beginning of adult life.
The 20s are a black box, and there is a lot of churning in there. One-third of people in their 20s move to a new residence every year. Forty percent move back home with their parents at least once. They go through an average of seven jobs in their 20s, more job changes than in any other stretch. Two-thirds spend at least some time living with a romantic partner without being married. And marriage occurs later than ever. The median age at first marriage in the early 1970s, when the baby boomers were young, was 21 for women and 23 for men; by 2009 it had climbed to 26 for women and 28 for men, five years in a little more than a generation.
We’re in the thick of what one sociologist calls “the changing timetable for adulthood.” Sociologists traditionally define the “transition to adulthood” as marked by five milestones: completing school, leaving home, becoming financially independent, marrying and having a child. In 1960, 77 percent of women and 65 percent of men had, by the time they reached 30, passed all five milestones. Among 30-year-olds in 2000, according to data from the United States Census Bureau, fewer than half of the women and one-third of the men had done so. A Canadian study reported that a typical 30-year-old in 2001 had completed the same number of milestones as a 25-year-old in the early ’70s.
The whole idea of milestones, of course, is something of an anachronism; it implies a lockstep march toward adulthood that is rare these days. Kids don’t shuffle along in unison on the road to maturity. They slouch toward adulthood at an uneven, highly individual pace. Some never achieve all five milestones, including those who are single or childless by choice, or unable to marry even if they wanted to because they’re gay. Others reach the milestones completely out of order, advancing professionally before committing to a monogamous relationship, having children young and marrying later, leaving school to go to work and returning to school long after becoming financially secure.
Even if some traditional milestones are never reached, one thing is clear: Getting to what we would generally call adulthood is happening later than ever. But why? That’s the subject of lively debate among policy makers and academics. To some, what we’re seeing is a transient epiphenomenon, the byproduct of cultural and economic forces. To others, the longer road to adulthood signifies something deep, durable and maybe better-suited to our neurological hard-wiring. What we’re seeing, they insist, is the dawning of a new life stage — a stage that all of us need to adjust to.
JEFFREY JENSEN ARNETT, a psychology professor at Clark University in Worcester, Mass., is leading the movement to view the 20s as a distinct life stage, which he calls “emerging adulthood.” He says what is happening now is analogous to what happened a century ago, when social and economic changes helped create adolescence — a stage we take for granted but one that had to be recognized by psychologists, accepted by society and accommodated by institutions that served the young. Similar changes at the turn of the 21st century have laid the groundwork for another new stage, Arnett says, between the age of 18 and the late 20s. Among the cultural changes he points to that have led to “emerging adulthood” are the need for more education to survive in an information-based economy; fewer entry-level jobs even after all that schooling; young people feeling less rush to marry because of the general acceptance of premarital sex, cohabitation and birth control; and young women feeling less rush to have babies given their wide range of career options and their access to assisted reproductive technology if they delay pregnancy beyond their most fertile years.
Just as adolescence has its particular psychological profile, Arnett says, so does emerging adulthood: identity exploration, instability, self-focus, feeling in-between and a rather poetic characteristic he calls “a sense of possibilities.” A few of these, especially identity exploration, are part of adolescence too, but they take on new depth and urgency in the 20s. The stakes are higher when people are approaching the age when options tend to close off and lifelong commitments must be made. Arnett calls it “the age 30 deadline.”
The issue of whether emerging adulthood is a new stage is being debated most forcefully among scholars, in particular psychologists and sociologists. But its resolution has broader implications. Just look at what happened for teenagers. It took some effort, a century ago, for psychologists to make the case that adolescence was a new developmental stage. Once that happened, social institutions were forced to adapt: education, health care, social services and the law all changed to address the particular needs of 12- to 18-year-olds. An understanding of the developmental profile of adolescence led, for instance, to the creation of junior high schools in the early 1900s, separating seventh and eighth graders from the younger children in what used to be called primary school. And it led to the recognition that teenagers between 14 and 18, even though they were legally minors, were mature enough to make their own choice of legal guardian in the event of their parents’ deaths. If emerging adulthood is an analogous stage, analogous changes are in the wings.
But what would it look like to extend some of the special status of adolescents to young people in their 20s? Our uncertainty about this question is reflected in our scattershot approach to markers of adulthood. People can vote at 18, but in some states they don’t age out of foster care until 21. They can join the military at 18, but they can’t drink until 21. They can drive at 16, but they can’t rent a car until 25 without some hefty surcharges. If they are full-time students, the Internal Revenue Service considers them dependents until 24; those without health insurance will soon be able to stay on their parents’ plans even if they’re not in school until age 26, or up to 30 in some states. Parents have no access to their child’s college records if the child is over 18, but parents’ income is taken into account when the child applies for financial aid up to age 24. We seem unable to agree when someone is old enough to take on adult responsibilities. But we’re pretty sure it’s not simply a matter of age.
If society decides to protect these young people or treat them differently from fully grown adults, how can we do this without becoming all the things that grown children resist — controlling, moralizing, paternalistic? Young people spend their lives lumped into age-related clusters — that’s the basis of K-12 schooling — but as they move through their 20s, they diverge. Some 25-year-olds are married homeowners with good jobs and a couple of kids; others are still living with their parents and working at transient jobs, or not working at all. Does that mean we extend some of the protections and special status of adolescence to all people in their 20s? To some of them? Which ones? Decisions like this matter, because failing to protect and support vulnerable young people can lead them down the wrong path at a critical moment, the one that can determine all subsequent paths. But overprotecting and oversupporting them can sometimes make matters worse, turning the “changing timetable of adulthood” into a self-fulfilling prophecy.
The more profound question behind the scholarly intrigue is the one that really captivates parents: whether the prolongation of this unsettled time of life is a good thing or a bad thing. With life spans stretching into the ninth decade, is it better for young people to experiment in their 20s before making choices they’ll have to live with for more than half a century? Or is adulthood now so malleable, with marriage and employment options constantly being reassessed, that young people would be better off just getting started on something, or else they’ll never catch up, consigned to remain always a few steps behind the early bloomers? Is emerging adulthood a rich and varied period for self-discovery, as Arnett says it is? Or is it just another term for self-indulgence?
THE DISCOVERY OF adolescence is generally dated to 1904, with the publication of the massive study “Adolescence,” by G. Stanley Hall, a prominent psychologist and first president of the American Psychological Association. Hall attributed the new stage to social changes at the turn of the 20th century. Child-labor laws kept children under 16 out of the work force, and universal education laws kept them in secondary school, thus prolonging the period of dependence — a dependence that allowed them to address psychological tasks they might have ignored when they took on adult roles straight out of childhood. Hall, the first president of Clark University — the same place, interestingly enough, where Arnett now teaches — described adolescence as a time of “storm and stress,” filled with emotional upheaval, sorrow and rebelliousness. He cited the “curve of despondency” that “starts at 11, rises steadily and rapidly till 15 . . . then falls steadily till 23,” and described other characteristics of adolescence, including an increase in sensation seeking, greater susceptibility to media influences (which in 1904 mostly meant “flash literature” and “penny dreadfuls”) and overreliance on peer relationships. Hall’s book was flawed, but it marked the beginning of the scientific study of adolescence and helped lead to its eventual acceptance as a distinct stage with its own challenges, behaviors and biological profile.
In the 1990s, Arnett began to suspect that something similar was taking place with young people in their late teens and early 20s. He was teaching human development and family studies at the University of Missouri, studying college-age students, both at the university and in the community around Columbia, Mo. He asked them questions about their lives and their expectations like, “Do you feel you have reached adulthood?”
“I was in my early- to mid-30s myself, and I remember thinking, They’re not a thing like me,” Arnett told me when we met last spring in Worcester. “I realized that there was something special going on.” The young people he spoke to weren’t experiencing the upending physical changes that accompany adolescence, but as an age cohort they did seem to have a psychological makeup different from that of people just a little bit younger or a little bit older. This was not how most psychologists were thinking about development at the time, when the eight-stage model of the psychologist Erik Erikson was in vogue. Erikson, one of the first to focus on psychological development past childhood, divided adulthood into three stages — young (roughly ages 20 to 45), middle (about ages 45 to 65) and late (all the rest) — and defined them by the challenges that individuals in a particular stage encounter and must resolve before moving on to the next stage. In young adulthood, according to his model, the primary psychological challenge is “intimacy versus isolation,” by which Erikson meant deciding whether to commit to a lifelong intimate relationship and choosing the person to commit to.
But Arnett said “young adulthood” was too broad a term to apply to a 25-year span that included both him and his college students. The 20s are something different from the 30s and 40s, he remembered thinking. And while he agreed that the struggle for intimacy was one task of this period, he said there were other critical tasks as well.
Arnett and I were discussing the evolution of his thinking over lunch at BABA Sushi, a quiet restaurant near his office where he goes so often he knows the sushi chefs by name. He is 53, very tall and wiry, with clipped steel-gray hair and ice-blue eyes, an intense, serious man. He describes himself as a late bloomer, a onetime emerging adult before anyone had given it a name. After graduating from Michigan State University in 1980, he spent two years playing guitar in bars and restaurants and experimented with girlfriends, drugs and general recklessness before going for his doctorate in developmental psychology at the University of Virginia. By 1986 he had his first academic job at Oglethorpe University, a small college in Atlanta. There he met his wife, Lene Jensen, the school’s smartest psych major, who stunned Arnett when she came to his office one day in 1989, shortly after she graduated, and asked him out on a date. Jensen earned a doctorate in psychology, too, and she also teaches at Clark. She and Arnett have 10-year-old twins, a boy and a girl.
Arnett spent time at Northwestern University and the University of Chicago before moving to the University of Missouri in 1992, beginning his study of young men and women in the college town of Columbia, gradually broadening his sample to include New Orleans, Los Angeles and San Francisco. He deliberately included working-class young people as well as those who were well off, those who had never gone to college as well as those who were still in school, those who were supporting themselves as well as those whose bills were being paid by their parents. A little more than half of his sample was white, 18 percent African-American, 16 percent Asian-American and 14 percent Latino.
More than 300 interviews and 250 survey responses persuaded Arnett that he was onto something new. This was the era of the Gen X slacker, but Arnett felt that his findings applied beyond one generation. He wrote them up in 2000 in American Psychologist, the first time he laid out his theory of “emerging adulthood.” According to Google Scholar, which keeps track of such things, the article has been cited in professional books and journals roughly 1,700 times. This makes it, in the world of academia, practically viral. At the very least, the citations indicate that Arnett had come up with a useful term for describing a particular cohort; at best, that he offered a whole new way of thinking about them.
DURING THE PERIOD he calls emerging adulthood, Arnett says that young men and women are more self-focused than at any other time of life, less certain about the future and yet also more optimistic, no matter what their economic background. This is where the “sense of possibilities” comes in, he says; they have not yet tempered their idealistic visions of what awaits. “The dreary, dead-end jobs, the bitter divorces, the disappointing and disrespectful children . . . none of them imagine that this is what the future holds for them,” he wrote. Ask them if they agree with the statement “I am very sure that someday I will get to where I want to be in life,” and 96 percent of them will say yes. But despite elements that are exciting, even exhilarating, about being this age, there is a downside, too: dread, frustration, uncertainty, a sense of not quite understanding the rules of the game. More than positive or negative feelings, what Arnett heard most often was ambivalence — beginning with his finding that 60 percent of his subjects told him they felt like both grown-ups and not-quite-grown-ups.
Some scientists would argue that this ambivalence reflects what is going on in the brain, which is also both grown-up and not-quite-grown-up. Neuroscientists once thought the brain stops growing shortly after puberty, but now they know it keeps maturing well into the 20s. This new understanding comes largely from a longitudinal study of brain development sponsored by the National Institute of Mental Health, which started following nearly 5,000 children at ages 3 to 16 (the average age at enrollment was about 10). The scientists found the children’s brains were not fully mature until at least 25. “In retrospect I wouldn’t call it shocking, but it was at the time,” Jay Giedd, the director of the study, told me. “The only people who got this right were the car-rental companies.”
When the N.I.M.H. study began in 1991, Giedd said he and his colleagues expected to stop when the subjects turned 16. “We figured that by 16 their bodies were pretty big physically,” he said. But every time the children returned, their brains were found still to be changing. The scientists extended the end date of the study to age 18, then 20, then 22. The subjects’ brains were still changing even then. Tellingly, the most significant changes took place in the prefrontal cortex and cerebellum, the regions involved in emotional control and higher-order cognitive function.
As the brain matures, one thing that happens is the pruning of the synapses. Synaptic pruning does not occur willy-nilly; it depends largely on how any one brain pathway is used. By cutting off unused pathways, the brain eventually settles into a structure that’s most efficient for the owner of that brain, creating well-worn grooves for the pathways that person uses most. Synaptic pruning intensifies after rapid brain-cell proliferation during childhood and again in the period that encompasses adolescence and the 20s. It is the mechanism of “use it or lose it”: the brains we have are shaped largely in response to the demands made of them.
We have come to accept the idea that environmental influences in the first three years of life have long-term consequences for cognition, emotional control, attention and the like. Is it time to place a similar emphasis, with hopes for a similar outcome, on enriching the cognitive environment of people in their 20s?
N.I.M.H. scientists also found a time lag between the growth of the limbic system, where emotions originate, and of the prefrontal cortex, which manages those emotions. The limbic system explodes during puberty, but the prefrontal cortex keeps maturing for another 10 years. Giedd said it is logical to suppose — and for now, neuroscientists have to make a lot of logical suppositions — that when the limbic system is fully active but the cortex is still being built, emotions might outweigh rationality. “The prefrontal part is the part that allows you to control your impulses, come up with a long-range strategy, answer the question ‘What am I going to do with my life?’ ” he told me. “That weighing of the future keeps changing into the 20s and 30s.”
Among study subjects who enrolled as children, M.R.I. scans have been done so far only to age 25, so scientists have to make another logical supposition about what happens to the brain in the late 20s, the 30s and beyond. Is it possible that the brain just keeps changing and pruning, for years and years? “Guessing from the shape of the growth curves we have,” Giedd’s colleague Philip Shaw wrote in an e-mail message, “it does seem that much of the gray matter,” where synaptic pruning takes place, “seems to have completed its most dramatic structural change” by age 25. For white matter, where insulation that helps impulses travel faster continues to form, “it does look as if the curves are still going up, suggesting continued growth” after age 25, he wrote, though at a slower rate than before.
None of this is new, of course; the brains of young people have always been works in progress, even when we didn’t have sophisticated scanning machinery to chart it precisely. Why, then, is the youthful brain only now arising as an explanation for why people in their 20s are seeming a bit unfinished? Maybe there’s an analogy to be found in the hierarchy of needs, a theory put forth in the 1940s by the psychologist Abraham Maslow. According to Maslow, people can pursue more elevated goals only after their basic needs of food, shelter and sex have been met. What if the brain has its own hierarchy of needs? When people are forced to adopt adult responsibilities early, maybe they just do what they have to do, whether or not their brains are ready. Maybe it’s only now, when young people are allowed to forestall adult obligations without fear of public censure, that the rate of societal maturation can finally fall into better sync with the maturation of the brain.
Cultural expectations might also reinforce the delay. The “changing timetable for adulthood” has, in many ways, become internalized by 20-somethings and their parents alike. Today young people don’t expect to marry until their late 20s, don’t expect to start a family until their 30s, don’t expect to be on track for a rewarding career until much later than their parents were. So they make decisions about their futures that reflect this wider time horizon. Many of them would not be ready to take on the trappings of adulthood any earlier even if the opportunity arose; they haven’t braced themselves for it.
Nor do parents expect their children to grow up right away — and they might not even want them to. Parents might regret having themselves jumped into marriage or a career and hope for more considered choices for their children. Or they might want to hold on to a reassuring connection with their children as the kids leave home. If they were “helicopter parents” — a term that describes heavily invested parents who hover over their children, swooping down to take charge and solve problems at a moment’s notice — they might keep hovering and problem-solving long past the time when their children should be solving problems on their own. This might, in a strange way, be part of what keeps their grown children in the limbo between adolescence and adulthood. It can be hard sometimes to tease out to what extent a child doesn’t quite want to grow up and to what extent a parent doesn’t quite want to let go.
IT IS A BIG DEAL IN developmental psychology to declare the existence of a new stage of life, and Arnett has devoted the past 10 years to making his case. Shortly after his American Psychologist article appeared in 2000, he and Jennifer Lynn Tanner, a developmental psychologist at Rutgers University, convened the first conference of what they later called the Society for the Study of Emerging Adulthood. It was held in 2003 at Harvard with an attendance of 75; there have been three more since then, and last year’s conference, in Atlanta, had more than 270 attendees. In 2004 Arnett published a book, “Emerging Adulthood: The Winding Road From the Late Teens Through the Twenties,” which is still in print and selling well. In 2006 he and Tanner published an edited volume, “Emerging Adults in America: Coming of Age in the 21st Century,” aimed at professionals and academics. Arnett’s college textbook, “Adolescence and Emerging Adulthood: A Cultural Approach,” has been in print since 2000 and is now in its fourth edition. Next year he says he hopes to publish another book, this one for the parents of 20-somethings.
If all Arnett’s talk about emerging adulthood sounds vaguely familiar . . . well, it should. Forty years ago, an article appeared in The American Scholar that declared “a new stage of life” for the period between adolescence and young adulthood. This was 1970, when the oldest members of the baby boom generation — the parents of today’s 20-somethings — were 24. Young people of the day “can’t seem to ‘settle down,’ ” wrote the Yale psychologist Kenneth Keniston. He called the new stage of life “youth.”
Keniston’s description of “youth” presages Arnett’s description of “emerging adulthood” a generation later. In the late ’60s, Keniston wrote that there was “a growing minority of post-adolescents [who] have not settled the questions whose answers once defined adulthood: questions of relationship to the existing society, questions of vocation, questions of social role and lifestyle.” Whereas once, such aimlessness was seen only in the “unusually creative or unusually disturbed,” he wrote, it was becoming more common and more ordinary in the baby boomers of 1970. Among the salient characteristics of “youth,” Keniston wrote, were “pervasive ambivalence toward self and society,” “the feeling of absolute freedom, of living in a world of pure possibilities” and “the enormous value placed upon change, transformation and movement” — all characteristics that Arnett now ascribes to “emerging adults.”
Arnett readily acknowledges his debt to Keniston; he mentions him in almost everything he has written about emerging adulthood. But he considers the ’60s a unique moment, when young people were rebellious and alienated in a way they’ve never been before or since. And Keniston’s views never quite took off, Arnett says, because “youth” wasn’t a very good name for it. He has called the label “ambiguous and confusing,” not nearly as catchy as his own “emerging adulthood.”
For whatever reason Keniston’s terminology faded away, it’s revealing to read his old article and hear echoes of what’s going on with kids today. He was describing the parents of today’s young people when they themselves were young — and amazingly, they weren’t all that different from their own children now. Keniston’s article seems a lovely demonstration of the eternal cycle of life, the perennial conflict between the generations, the gradual resolution of those conflicts. It’s reassuring, actually, to think of it as recursive, to imagine that there must always be a cohort of 20-somethings who take their time settling down, just as there must always be a cohort of 50-somethings who worry about it.
KENISTON CALLED IT youth, Arnett calls it emerging adulthood; whatever it’s called, the delayed transition has been observed for years. But it can be in fullest flower only when the young person has some other, nontraditional means of support — which would seem to make the delay something of a luxury item. That’s the impression you get reading Arnett’s case histories in his books and articles, or the essays in “20 Something Manifesto,” an anthology edited by a Los Angeles writer named Christine Hassler. “It’s somewhat terrifying,” writes a 25-year-old named Jennifer, “to think about all the things I’m supposed to be doing in order to ‘get somewhere’ successful: ‘Follow your passions, live your dreams, take risks, network with the right people, find mentors, be financially responsible, volunteer, work, think about or go to grad school, fall in love and maintain personal well-being, mental health and nutrition.’ When is there time to just be and enjoy?” Adds a 24-year-old from Virginia: “There is pressure to make decisions that will form the foundation for the rest of your life in your 20s. It’s almost as if having a range of limited options would be easier.”
While the complaints of these young people are heartfelt, they are also the complaints of the privileged. Julie, a 23-year-old New Yorker and contributor to “20 Something Manifesto,” is apparently aware of this. She was coddled her whole life, treated to French horn lessons and summer camp, told she could do anything. “It is a double-edged sword,” she writes, “because on the one hand I am so blessed with my experiences and endless options, but on the other hand, I still feel like a child. I feel like my job isn’t real because I am not where my parents were at my age. Walking home, in the shoes my father bought me, I still feel I have yet to grow up.”
Despite these impressions, Arnett insists that emerging adulthood is not limited to young persons of privilege and that it is not simply a period of self-indulgence. He takes pains in “Emerging Adulthood” to describe some case histories of young men and women from hard-luck backgrounds who use the self-focus and identity exploration of their 20s to transform their lives.
One of these is the case history of Nicole, a 25-year-old African-American who grew up in a housing project in Oakland, Calif. At age 6, Nicole, the eldest, was forced to take control of the household after her mother’s mental collapse. By 8, she was sweeping stores and baby-sitting for money to help keep her three siblings fed and housed. “I made a couple bucks and helped my mother out, helped my family out,” she told Arnett. She managed to graduate from high school, but with low grades, and got a job as a receptionist at a dermatology clinic. She moved into her own apartment, took night classes at community college and started to excel. “I needed to experience living out of my mother’s home in order to study,” she said.
In his book, Arnett presents Nicole as a symbol of all the young people from impoverished backgrounds for whom “emerging adulthood represents an opportunity — maybe a last opportunity — to turn one’s life around.” This is the stage where someone like Nicole can escape an abusive or dysfunctional family and finally pursue her own dreams. Nicole’s dreams are powerful — one course away from an associate degree, she plans to go on for a bachelor’s and then a Ph.D. in psychology — but she has not really left her family behind; few people do. She is still supporting her mother and siblings, which is why she works full time even though her progress through school would be quicker if she found a part-time job. Is it only a grim pessimist like me who sees how many roadblocks there will be on the way to achieving those dreams and who wonders what kind of freewheeling emerging adulthood she is supposed to be having?
Of course, Nicole’s case is not representative of society as a whole. And many parents — including those who can’t really afford it — continue to help their kids financially long past the time they expected to. Two years ago Karen Fingerman, a developmental psychologist at Purdue University, asked parents of grown children whether they provided significant assistance to their sons or daughters. Assistance included giving their children money or help with everyday tasks (practical assistance) as well as advice, companionship and an attentive ear. Eighty-six percent said they had provided advice in the previous month; less than half had done so in 1988. Two out of three parents had given a son or daughter practical assistance in the previous month; in 1988, only one in three had.
Fingerman took solace in her findings; she said it showed that parents stay connected to their grown children, and she suspects that both parties get something out of it. The survey questions, after all, referred not only to dispensing money but also to offering advice, comfort and friendship. And another of Fingerman’s studies suggests that parents’ sense of well-being depends largely on how close they are to their grown children and how their children are faring — objective support for the adage that you’re only as happy as your unhappiest child. But the expectation that young men and women won’t quite be able to make ends meet on their own, and that parents should be the ones to help bridge the gap, places a terrible burden on parents who might be worrying about their own job security, trying to care for their aging parents or grieving as their retirement plans become more and more of a pipe dream.
This dependence on Mom and Dad also means that during the 20s the rift between rich and poor becomes entrenched. According to data gathered by the Network on Transitions to Adulthood, a research consortium supported by the John D. and Catherine T. MacArthur Foundation, American parents give an average of 10 percent of their income to their 18- to 21-year-old children. This percentage is basically the same no matter the family’s total income, meaning that upper-class kids tend to get more than working-class ones. And wealthier kids have other, less obvious, advantages. When they go to four-year colleges or universities, they get supervised dormitory housing, health care and alumni networks not available at community colleges. And they often get a leg up on their careers by using parents’ contacts to help land an entry-level job — or by using parents as a financial backup when they want to take an interesting internship that doesn’t pay.
“You get on a pathway, and pathways have momentum,” Jennifer Lynn Tanner of Rutgers told me. “In emerging adulthood, if you spend this time exploring and you get yourself on a pathway that really fits you, then there’s going to be this snowball effect of finding the right fit, the right partner, the right job, the right place to live. The less you have at first, the less you’re going to get this positive effect compounded over time. You’re not going to have the same acceleration.”
EVEN ARNETT ADMITS that not every young person goes through a period of “emerging adulthood.” It’s rare in the developing world, he says, where people have to grow up fast, and it’s often skipped in the industrialized world by the people who marry early, by teenage mothers forced to grow up, by young men or women who go straight from high school to whatever job is available without a chance to dabble until they find the perfect fit. Indeed, the majority of humankind would seem to not go through it at all. The fact that emerging adulthood is not universal is one of the strongest arguments against Arnett’s claim that it is a new developmental stage. If emerging adulthood is so important, why is it even possible to skip it?
“The core idea of classical stage theory is that all people — underscore ‘all’ — pass through a series of qualitatively different periods in an invariant and universal sequence in stages that can’t be skipped or reordered,” Richard Lerner, Bergstrom chairman in applied developmental science at Tufts University, told me. Lerner is a close personal friend of Arnett’s; he and his wife, Jacqueline, who is also a psychologist, live 20 miles from Worcester, and they have dinner with Arnett and his wife on a regular basis.
“I think the world of Jeff Arnett,” Lerner said. “I think he is a smart, passionate person who is doing great work — not only a smart and productive scholar, but one of the nicest people I ever met in my life.”
No matter how much he likes and admires Arnett, however, Lerner says his friend has ignored some of the basic tenets of developmental psychology. According to classical stage theory, he told me, “you must develop what you’re supposed to develop when you’re supposed to develop it or you’ll never adequately develop it.”
When I asked Arnett what happens to people who don’t have an emerging adulthood, he said it wasn’t necessarily a big deal. They might face its developmental tasks — identity exploration, self-focus, experimentation in love, work and worldview — at a later time, maybe as a midlife crisis, or they might never face them at all, he said. It depends partly on why they missed emerging adulthood in the first place, whether it was by circumstance or by choice.
No, said Lerner, that’s not the way it works. To qualify as a developmental stage, emerging adulthood must be both universal and essential. “If you don’t develop a skill at the right stage, you’ll be working the rest of your life to develop it when you should be moving on,” he said. “The rest of your development will be unfavorably altered.” The fact that Arnett can be so casual about the heterogeneity of emerging adulthood and its existence in some cultures but not in others — indeed, even in some people but not in their neighbors or friends — is what undermines, for many scholars, his insistence that it’s a new life stage.
Why does it matter? Because if the delay in achieving adulthood is just a temporary aberration caused by passing social mores and economic gloom, it’s something to struggle through for now, maybe feeling a little sorry for the young people who had the misfortune to come of age in a recession. But if it’s a true life stage, we need to start rethinking our definition of normal development and to create systems of education, health care and social supports that take the new stage into account.
The Network on Transitions to Adulthood has been issuing reports about young people since it was formed in 1999 and often ends up recommending more support for 20-somethings. But more of what, exactly? There aren’t institutions set up to serve people in this specific age range; social services from a developmental perspective tend to disappear after adolescence. But it’s possible to envision some that might address the restlessness and mobility that Arnett says are typical at this stage and that might make the experimentation of “emerging adulthood” available to more young people. How about expanding programs like City Year, in which 17- to 24-year-olds from diverse backgrounds spend a year mentoring inner-city children in exchange for a stipend, health insurance, child care, cellphone service and a $5,350 education award? Or a federal program in which a government-sponsored savings account is created for every newborn, to be cashed in at age 21 to support a year’s worth of travel, education or volunteer work — a version of the “baby bonds” program that Hillary Clinton mentioned during her 2008 primary campaign? Maybe we can encourage a kind of socially sanctioned “rumspringa,” the temporary moratorium from social responsibilities some Amish offer their young people to allow them to experiment before settling down. It requires only a bit of ingenuity — as well as some societal forbearance and financial commitment — to think of ways to expand some of the programs that now work so well for the elite, like the Fulbright fellowship or the Peace Corps, to make the chance for temporary service and self-examination available to a wider range of young people.
A century ago, it was helpful to start thinking of adolescents as engaged in the work of growing up rather than as merely lazy or rebellious. Only then could society recognize that the educational, medical, mental-health and social-service needs of this group were unique and that investing in them would have a payoff in the future. Twenty-somethings are engaged in work, too, even if it looks as if they are aimless or failing to pull their weight, Arnett says. But it’s a reflection of our collective attitude toward this period that we devote so few resources to keeping them solvent and granting them some measure of security.
THE KIND OF SERVICES that might be created if emerging adulthood is accepted as a life stage can be seen during a visit to Yellowbrick, a residential program in Evanston, Ill., that calls itself the only psychiatric treatment facility for emerging adults. “Emerging adults really do have unique developmental tasks to focus on,” said Jesse Viner, Yellowbrick’s executive medical director. Viner started Yellowbrick in 2005, when he was working in a group psychiatric practice in Chicago and saw the need for a different way to treat this cohort. He is a soft-spoken man who looks like an accountant and sounds like a New Age prophet, peppering his conversation with phrases like “helping to empower their agency.”
“Agency” is a tricky concept when parents are paying the full cost of Yellowbrick’s comprehensive residential program, which comes to $21,000 a month and is not always covered by insurance. Staff members are aware of the paradox of encouraging a child to separate from Mommy and Daddy when it’s on their dime. They address it with a concept they call connected autonomy, which they define as knowing when to stand alone and when to accept help.
Patients come to Yellowbrick with a variety of problems: substance abuse, eating disorders, depression, anxiety or one of the more severe mental illnesses, like schizophrenia or bipolar disorder, that tend to appear in the late teens or early 20s. The demands of imminent independence can worsen mental-health problems or can create new ones for people who have managed up to that point to perform all the expected roles — son or daughter, boyfriend or girlfriend, student, teammate, friend — but get lost when schooling ends and expected roles disappear. That’s what happened to one patient who had done well at a top Ivy League college until the last class of the last semester of his last year, when he finished his final paper and could not bring himself to turn it in.
The Yellowbrick philosophy is that young people must meet these challenges without coddling or rescue. Up to 16 patients at a time are housed in the Yellowbrick residence, a four-story apartment building Viner owns. They live in the apartments — which are large, sunny and lavishly furnished — in groups of three or four, with staff members always on hand to teach the basics of shopping, cooking, cleaning, scheduling, making commitments and showing up.
Viner let me sit in on daily clinical rounds, scheduled that day for C., a young woman who had been at Yellowbrick for three months. Rounds are like the world’s most grueling job interview: the patient sits in front alongside her clinician “advocate,” and a dozen or so staff members are arrayed on couches and armchairs around the room, firing questions. C. seemed nervous but pleased with herself, frequently flashing a huge white smile. She is 22, tall and skinny, and she wore tiny denim shorts and a big T-shirt and vest. She started to fall apart during her junior year at college, plagued by binge drinking and anorexia, and in her first weeks at Yellowbrick her alcohol abuse continued. Most psychiatric facilities would have kicked her out after the first relapse, said Dale Monroe-Cook, Yellowbrick’s vice president of clinical operations. “We’re doing the opposite: we want the behavior to unfold, and we want to be there in that critical moment, to work with that behavior and help the emerging adult transition to greater independence.”
The Yellowbrick staff let C. face her demons and decide how to deal with them. After five relapses, C. asked the staff to take away her ID so she couldn’t buy alcohol. Eventually she decided to start going to meetings of Alcoholics Anonymous.
At her rounds in June, C. was able to report that she had been alcohol-free for 30 days. Jesse Viner’s wife, Laura Viner, who is a psychologist on staff, started to clap for her, but no one else joined in. “We’re on eggshells here,” Gary Zurawski, a clinical social worker specializing in substance abuse, confessed to C. “We don’t know if we should congratulate you too much.” The staff was sensitive about taking away the young woman’s motivation to improve her life for her own sake, not for the sake of getting praise from someone else.
C. took the discussion about the applause in stride and told the staff she had more good news: in two days she was going to graduate. On time.
THE 20S ARE LIKE the stem cell of human development, the pluripotent moment when any of several outcomes is possible. Decisions and actions during this time have lasting ramifications. The 20s are when most people accumulate almost all of their formal education; when most people meet their future spouses and the friends they will keep; when most people start on the careers that they will stay with for many years. This is when adventures, experiments, travels, relationships are embarked on with an abandon that probably will not happen again.
Does that mean it’s a good thing to let 20-somethings meander — or even to encourage them to meander — before they settle down? That’s the question that plagues so many of their parents. It’s easy to see the advantages to the delay. There is time enough for adulthood and its attendant obligations; maybe if kids take longer to choose their mates and their careers, they’ll make fewer mistakes and live happier lives. But it’s just as easy to see the drawbacks. As the settling-down sputters along for the “emerging adults,” things can get precarious for the rest of us. Parents are helping pay bills they never counted on paying, and social institutions are missing out on young people contributing to productivity and growth. Of course, the recession complicates things, and even if every 20-something were ready to skip the “emerging” moratorium and act like a grown-up, there wouldn’t necessarily be jobs for them all. So we’re caught in a weird moment, unsure whether to allow young people to keep exploring and questioning or to cut them off and tell them just to find something, anything, to put food on the table and get on with their lives.
Arnett would like to see us choose a middle course. “To be a young American today is to experience both excitement and uncertainty, wide-open possibility and confusion, new freedoms and new fears,” he writes in “Emerging Adulthood.” During the timeout they are granted from nonstop, often tedious and dispiriting responsibilities, “emerging adults develop skills for daily living, gain a better understanding of who they are and what they want from life and begin to build a foundation for their adult lives.” If it really works that way, if this longer road to adulthood really leads to more insight and better choices, then Arnett’s vision of an insightful, sensitive, thoughtful, content, well-honed, self-actualizing crop of grown-ups would indeed be something worth waiting for.
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