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May 14, 2014

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Posted: 14 May 2014 12:06 AM PDT

'What Is Social Insurance? Take Two'

Posted: 13 May 2014 01:05 PM PDT

James Kwak:

What Is Social Insurance? Take Two: More than a year ago I wrote a post titled "What Is Social Insurance?"... In that post, I more or less took the mainstream progressive view: programs like Social Security are risk-spreading programs that provide insurance against common risks like disability, living too long, poor health in old age, and so on....
I still think that social insurance programs ... provide risk-spreading insurance when viewed over a long time horizon. So from a lifetime perspective, the insurance function means that most people are made better off, even though a program as a whole may be a zero-sum game in dollar terms. But ... a crucial feature of social insurance is that it is redistributive in the short term (in an ex ante sense, not the trivial ex post sense that is true of all insurance) but risk-spreading in the long term. I happen to think that the world would be a better place if we considered the long term and, therefore, decided to maintain these programs. But I don't think it's obviously true that a lifetime perspective is correct and a one-year perspective is incorrect.
In particular, if you think that Social Security won't be around when you retire, then you would logically take a short-term perspective in which you pay taxes but never receive benefits (unless you go on disability, or you die while Social Security still exists). Then you should rationally want to eliminate Social Security as soon as possible. Conversely, if you believe that Social Security will be around when you retire, then you will evaluate the whole thing, including its insurance value, which will make you more likely to vote for it. So it's not surprising that a major component of the anti-Social Security campaign consists of trying to convince young people (who ordinarily gain the most from insurance, since they face the most uncertainty) that Social Security cannot exist when they retire.
If you want to read more, the draft chapter is up on SSRN. Enjoy.

Just one comment. I wish he'd made it clear that the worries about Social Security not being there for the young of today are unfounded.

'Labor Market Seems Dented, Not Broken'

Posted: 13 May 2014 09:45 AM PDT

Justin Wolfers:

Labor Market Seems Dented, Not Broken, by Justin Wolfers: There are two schools of thought about the longer-term prospects for the labor market. The darker view is that the Great Recession wrought permanent damage: The jobs that disappeared aren't easily replaced, and the skills of the jobless are a poor match for the jobs that remain. ...
The sunnier view is that this is not a permanent shift, but rather the natural course of a recession... It's a sunnier view because it suggests that a continuing recovery will largely solve our unemployment problem..., leaving no lasting mark.
The past two years have been kind to this more optimistic interpretation. ... It is surely too early to draw strong conclusions, but continued movements in this direction would suggest that the Great Recession hasn't done lasting damage, and that it's possible for the unemployment rate to head back toward 5 percent without the emergence of hiring bottlenecks.

It seems clear to me that there has been permanent damage, but we shall see...

'Asymmetric Misinformation'

Posted: 13 May 2014 09:44 AM PDT

Paul Krugman:

Asymmetric Misinformation: A follow-up to my post about Jaime Caruana at the BIS. One other thing that struck me was his claim that

policymakers respond asymmetrically over successive business and financial cycles, hardly tightening or even easing during booms and easing aggressively and persistently during busts

Is this true? Anyway, is symmetry in policy responses inherently desirable?

The claim that policymakers have an easy-money bias is one of those things usually said with an air of worldy wisdom; of course people don't want to take away the punchbowl when everyone is having fun. But the reality doesn't look at all like that. After all, if policy were consistently doing too much to fight slumps and not enough to curb booms, what you would expect is a steady ratcheting up of inflation — which isn't at all what has happened over the past 35 years. This supposed piece of wisdom is actually a cliche from the 1970s, which hasn't been remotely true for a generation. ...

Incidentally, the fake wisdom on monetary policy resembles a corresponding piece of fake wisdom on fiscal policy — the claim that fiscal stimulus inevitably turns into a permanent rise in government spending, because the programs never go away. That didn't happen this time... And in fact it has never happened in the United States, as far as I can tell...

Beyond that, there are in fact good reasons for asymmetry in the response to booms and slumps...

He goes on to explain why. I'd add another reason why "symmetry is not a virtue," the difference in costs between inflation and unemployment. I believe that the costs of unemployment are much higher than the costs of inflation running a point or two (or three of four) above target, so if there is a mistake to be made, it's best to err on doing too much in a recession.

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