Five Good Questions for William J. Bernstein of 'Efficient Frontier'

If there’s one myth that’s more corrosive than any, it’s the notion of “job-killing taxes.”  By that logic, Somalia should be the world’s richest nation, and Sweden and Switzerland the poorest; Massachusetts ought to be our poorest state, and Mississippi the richest.

It’s a brutal fact that in highly productive societies, a lot of income needs to be redistributed. The objective evidence on the subject suggests that marginal tax rates have to be very high — in the range of 70%-80% — before the income effect becomes overwhelmed by the incentive effect; I find it hard to believe that Bill Gates, Larry Page, or Mark Zuckerberg are going to work any less hard if their income tax rate jumps to 45%. 

(Parenthetically, I might also add that before the Reagan era, the period of highest U.S. economic growth, we had top marginal rates in excess of 90%. And yes, when states raise income tax rates, jobs leave for low-tax states. But that’s only because we give the states far too much autonomy on that score. Take away the ability of states and municipalities to tax, and that problem disappears.)

I’d better stop talking before folks start picketing at my doorstep!

What essential services can and does a good financial advisor provide?

The three most important things are, in order, discipline, discipline, and discipline: the ability to maintain a strategy no matter what CNBC and USA Today are blathering about. After that, the humility to know that you cannot predict market movements and the historical awareness to know that economic forecasts are usually contrary indicators.

In economists’ terms, one of the foundational aspects of a person’s utility function is the intertemporal marginal rate of substitution, one’s willingness to forego current consumption in order to consume more in the future.  Do you have any practical ideas for accomplishing that, particularly as it relates to retirement planning?

I’ll forego the 50-cent words and simply say that wealth is not a dollar amount, but rather a ratio measured in years: in other words, how many years’ living expenses you’ve saved.  The person with a million dollars who needs to spend only $50,000 annually is twice as rich as the person who needs $100,000.

If you think that your happiness is tied up in the things you own, then you are both sadly misinformed about human neuropsychology and doomed to be unhappy. Bottom line: keep your expenses down, save like hell, don’t stop until you’re pushing up the daisies, and look for “utility” in the things that really matter: connections with other people, competence in a vocation or avocation, and most importantly, acquiring autonomy over your time and effort, i.e., becoming your own boss.

If you can’t reach those three goals by the time you’re in late middle age, you’re toast.

A related question — if a commitment device is something that “takes choice off the table,” what commitment devices might advisors use to help their clients plan better and save more?

I’m not sure I know how to answer that one. I’m too old to be nagging people to spend less and save more; it’s a lot simpler and easier to not work with folks who don’t know how to live within their means.