Relevant and even prescient commentary on news, politics and the economy.

New Deputy Commissioner of Social Security

by Bruce Webb

Balt Sun: Obama picks Carolyn Colvin for SSA Deputy

President Barack Obama has chosen Carolyn W. Colvin of Maryland to be deputy commissioner of Social Security, the White House announced Thursday. Currently special assistant to Maryland’s transportation secretary, Colvin was Montgomery County Health and Human Services director until her dismissal by newly elected county executive Ike Leggett in November 2006. She previously served as a deputy commissioner at the Social Security Administration and is a member of the National Committee to Preserve Social Security and Medicare and the National Forum for Black Public Administrators.

I don’t know anything about Colvin except that she perviously served as Deputy Commissioner for Programs and Policy in at least 1997, i.e. under Clinton. Here is a policy statement from her then:

Here is the SSA Org Chart: In it you can see there is a Deputy Commissioner in the Office of the Commissioner which you could call “The” Deputy Commissioner and then 13 Divisions for various operational and policy areas, nine of them headed by a Deputy Commissioner for ‘X’. Colvin is being slotted into the actual number two slot which naturally on this org chart is listed as “Vacant”.

I don’t know the implications. That she served in the Clinton era SSA is a mixed bag, that she is currently a member of NCPSSM is a good sign for supporters of traditional Social Security. And it is also good that she has a background as a line administrator as opposed to an academic background. Less likely to let policy get blinded by pretty theories.

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In One Sentence What Once Took Four LONG Parts

Once Again, D-Squared Explains It All:

[T]he Big Mac Index can plausibly claim to be the major methodological forerunner of Freakonomics, as it combines the two methodological techniques of choosing “quirky” instruments more valuable for their amusement value than their validity, and not checking anything to see whether it’s economically meaningful.

I’m not certain that “economically” is strictly necessary there.

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Frankly I’m with Frank

Probably I accept elimination of the rule that financial companies must offer plain vanilla products for a different reason, since he isn’t as ignorant as I am, but I would think that with a plain vanilly requirement, banks would offer plain vanilla products on terrible terrible terms. 30 year mortgage OK but the interest rate is 10% per year say.

To the extent that people use the plain vanilla product to judge the fudge swirl products, this will trick them into thinking that fudge swirl is great for their health. In fact, I’m amazed that bankers aren’t already using that scam.

Now to be franker than Frank, I assume there is a back room deal in which the finance lobby agrees not to use extreme methods to fight other reforms so long as the plain vanilla is in the trash can. I mean the arguments made in public by politicians are justifications of decisions which are often made for other reasons.

Explanations of what the hell I’m talking about after the jump.


“plain vanilla adj applied to financial services. It means like your father’s financial services for example 30 year fixed rate mortgages or you borrow at exactly 20% no matter what credit cards. It was proposed that financial service companies be required to offer such products. Somehow that provision has been deleted from proposed reforms.

Fudge swirl adj. an alternative to plain vanilla. Does *not* imply that financial service companies will necessarily mislead with confusing technical truths and near truths until customers heads spin if they don’t just sell plain vanilla products. Any such inference falsely ascribes an attitude of reflexive hatred of financiers to Robert Waldmann some one of whose best friends is a hedge fund manager.

Frank: noun corresponds to the adjective frank and to the chairman of the house banking committee. The only proof that it is possible to be simultaneously intelligent honest and a congressman. Just argued

I remember the days when the bars had to serve food if they were going to serve liquor, and they served [the most] God awful food known to human beings, and I think you know trying to force someone to do good is a very, very qualitatively different, and I think often futile, effort, rather than preventing [someone] from doing bad.

As noted above, I find that argument convincing, but I doubt that representative Frank does.

Frankly I’m with Frank: truely obscure outdated pop reference to the lil Abner comic strip.

Shmoo: a creature in lil Abner. State of stressed yeast cells which enables them to survive stressful conditions, and a fundamental false assumption in growth and real business cycle theory which caused economist in Cambridge UK (who did not have acces to lil Abner) to have a cow (which is not a shmoo).

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The Fed’s moving target: NAIRU

by Rebecca

Neal Soss and Henry Mo at Credit Suisse published a very interesting article, “Where is full employment in a more volatile macroeconomy?”, where they argue that the natural (long run) rate of unemployment may be shifting (they do this by showing that the Beveridge curve, which plots the the job vacancy rate against the unemployment rate, is shifting upward). I cannot provide a link, but here are their conclusions pertaining to monetary policy:

In the case of rising NAIRU [RW: this is the rate of unemployment that does not grow inflation, often called the long-run rate] and higher economic volatility, the monetary policy implication is complicated.

On the one hand, a higher NAIRU suggests that it would require a strong and prolonged recovery for the unemployment rate to return to the level attained in the past two decades. This scenario argues for a long period of low interest rates, because the economy’s structure will make it harder to get unemployment back to the low levels of recent business expansions.

On the other hand, a higher NAIRU suggests higher inflation pressure, as the output gap is smaller than otherwise would be the case. In other words, the Fed would have to normalize its policy stance sooner than would have been the case warranted by a stable NAIRU.

The burden of this is likely to be several years of quite low short-term interest rates by any modern standard other than the zero-ish levels of today. Even if the NAIRU is deteriorating, it is likely to be several years before the economy generates enough of a drop in unemployment to get to the new NAIRU, presumably above the levels of the last 20 years but surely below the current 9.7% unemployment rate. Between now and then, high unemployment is likely to remain the focus of policy attention. Labor market policies, such as job retraining for the unemployed, to improve the inflation unemployment trade-off, would make the central bank’s job a lot easier as that longer-run unfolds.

Basically, if the long-run level of unemployment, which the Fed targets implicitly under their dual mandate (maximum sustainable employment and stable prices), is changing then the Fed’s job becomes that much more difficult. Policy is only as good as the model’s calibration: they need to confidently estimate and target a level of employment that may be very much in flux. A simple Taylor Rule estimation illustrates this point.

Note: The Taylor Rule is a policy rule that relates the federal funds target to inflation and the output gap: roughly speaking, as inflation rises relative to the output gap, the Fed should tighten (raise its target); and as the output gap rises relative to inflation, then Fed should ease (lower its target). I estimate the relationship, and you can view my data here, and Wells Fargo’s forecast here.

On one hand, the CBO projects that NAIRU is 4.8%. In this case, the Taylor Rule policy drops the fed funds target to -4.6% by the end of the year. Put it this way: the output gap is so big that policy is very, very aggressive but bound by zero.

On the other hand, if NAIRU has shifted to something more like 6% – this is roughly its level in the 1980’s – then the policy prescription is less aggressive. The output gap remains wide, but the implied target rises to -3% rather than almost -5% – still negative, but suggestive of a more benign policy strategy. Inflation pressures would start to build earlier than under the 4.8% case.

This complexity has been documented by the Fed in the minutes of their August 2009 meeting:

Though recent data indicated that the pace at which employment was declining had slowed appreciably, job losses remained sizable. Moreover, long-term unemployment and permanent separations continued to rise, suggesting possible problems of skill loss and a need for labor reallocation that could slow recovery in employment as the economy begins to expand.

Note: this not the same thing as a jobless recovery – the unemployment rate may very well fall with economic growth (no jobless recovery), but then settle at a structurally higher level.

Rebecca Wilder

P.S. I will not be able to respond to comments until tomorrow.

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So Did Lucas Create HyperRational Expectations?


Lots of people appear to be forgetting this one or getting it wrong…the central model of The General Theory of Employment, Interest and Money is a rational expectations model.

The difference with the soi-disant “rational expectations” school is over the expectations-forming process with respect to the effect on price and output of monetary policy, not anything else. Hope that’s cleared up now. [emphasis, style change mine]

I think I see the problem now. Everyone obsesses over every aspect of fiscal and monetary policy. When do they work—and, more importantly, how do they develop skill sets and core competencies (“competitive advantages”)—in the Lucas model?

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Where Can You Be?

by Noni Mausa

Believe me, I am grateful. It saves me so much time and trouble in listening to government officials, to know that once they use the word “academic” as an epithet I can stop listening at once and go take a shower instead.

In their minds, “academic” means “someone who spends their whole working life studying, researching and teaching one specific topic, and who therefore knows less about it than the boyos down at the Salisbury House Saturday morning breakfast club.

Rich Coleman, BCs Minister of Housing and Social Development, sprang the A word early in his CBC interview Thursday morning, as he pooh-poohed the insistence of Helen Lenskyj, author and professor emeritus in sociology at the University of Toronto, that virtually every Olympic host city swept their homeless under the rug prior to the big event. “This government has spent more money on housing initiatives than at any time in BC government,” Coleman proudly said, after he lost interest in declaring that Dr. Lenskyj didn’t know what she was talking about because she had never delivered a social program. Oh, and Coleman added that the proposed bylaw giving the police the power to move people to shelters by force in bad weather is totally unrelated to the looming Olympic invasion, due to strike during the bitter bonechilling cold of Vancouver’s — umm — rainy season.

(Sorry, I am from Winnipeg (the place where Celsius meets Fahrenheit every winter) and I must scoff. Nyah, nyah, our homeless are tougher than your homeless.)

The whole predictable, lamentable situation of shifting the homeless along like a quadrennial cattle drive, leads me to another rather claustrophobic question. I will get there by way of a roomful of pennies.

Long ago in university, our professor in Psych 101 asked us all to take out a penny and flip it. Those who got “heads” flipped again. After a few iterations, we were left with only a couple of people out of a room of 300, whose every flip had come up roses. Were these people some miracle-workers? No, even we clueless undergrads could not miss, seen in the aggregate, the falsity of that idea. The “winners” had just by random luck threaded a maze and popped out the bottom when so many had been held back, also by plain chance.

Shift your view to the job market. It’s true that skill and education and aptitude effect who is employed and who isn’t, but luck also plays a part, and as productivity becomes higher the spots available to be fought over become fewer. In a country of millions, many will flip and continually get tails, and wind up with no income at all.

Question — in a free nation, where can the man of many tails be?

Literally, where can he be? If a citizen cannot rent or buy, if he fears the tuberculosis or violence of shelters, if he cannot even set up a tent in the wilderness (it’s Crown/Federal land, not his) than where can he be?

Everyone has to be somewhere. Where can you be, when your pennies give out?

[Crossposted from the Canadian blog “The Galloping Beaver”]

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CGI Yesterday: Interlude

I don’t have my notes all together from yesterday, but Lance Mannion hits most of the second half of the day with this, this, this, and this post.

Especially check out the last one. One panelist’s description yesterday of putting glasses on a child yesterday was as if it were directly out of the opening of Lawrence Norfolk’s Lemprière’s Dictionary:

The lenses sucked his eye-balls through the frames, dashed them into the first elected object. The stove. He was in the flames. They were licking greedily at him…behind the flames two eyes caught his, an horrible, misshapen face, a twisted body, eyes black with ancient cruelties, the legs curling and unfurling at him, like serpents. I see you John Lemprière, hissed from each mouth. Erichthonius. Curling and unfurling like snakes. Like flames. Just flames. Flames in a stove in a room. A room between Minerva’s shrine and Vulcan’s forge.

‘Welcome to the visible world, John Lemprière.’ …

Lempière shivered and blinked. The stove was but a stove, the room but a room….Lemprière could see.

People who have seen miracles want to see them again, not the mention the effect on people for whom seeing is a miracle.

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Deficits Debt and Capital Formation

Robert Waldmann

Matthew Yglesias is completely mystified by opposition to deficit spending by the public and by Michele Boldrin. I basically agree with him, but I think that he is missing something.

In response to public opposition to deficit spending he expresses the Keynesian argument perfectly

Thinking about it rationally, the reason to worry about large deficits is that they can impede economic growth. That makes it generally worthwhile to try to run balanced budgets over the course of the business cycle. But under circumstances when running a larger deficit doesn’t hurt growth, there’s no real reason to try to avoid deficits. It’s not like the Gods of budgetary balance have some other way to punish countries for large deficits other than reduced growth.

In responce to Michele

If the quantity of the borrowing becomes so large that it’s driving up interest rates, then the situation really is different. But I think all stimulus advocates acknowledge that. And if interest rates aren’t moving, then nothing magical happens when the rainy day fund [-1 times public debt] goes from $5 to $-5 and nothing about the lack of fiscal prudence of the Bush administration changes the fact that it would be perverse for the federal government to respond to a recession with pro-cyclical fiscal policies.

In each case Yglesias considers current interest rates and the deficit not the stock of debt.

Put roughly, when the public debt goes from $-5 to $5 the effect on welfare is much less than $10, but when it goes from $10,000,000,000,000 to
$ 10,000,000,000,010 then the social cost is much migher (maybe even $1).

Yglesias’ argument is made less elegantly by Krugman being ultra wonkish. In Krugman’s model, the stock of debt at the time we fall into the recession and liquidity trap doesn’t matter at all.
I’d alwmost tend to suspect that Yglesias read that post and found the model a convincingly useful approximation to reality.

However, Krugman’s model was designed to be immune to fresh water criticisms and not to be realistic. In the model there is Ricardian equivalence. This means that higher public debt does drive up consumption (government bonds are not perceived to be net wealth) and crowd out investment.

In the real world, public debt crowds out investment. This means that when deciding fiscal policy now, we have to forecast its effect on public debt in the future. Even if interest rates now are at the zero barrier (liquidity trap) they won’t be in the future. If deficit spending now implies more debt in the future, then it will cause higher interest rates and less investment in the future.

Deficit spending now will imply more debt in the future. Another aspect of Krugman’s model is that Krugman assumes that he is in control (he discusses optimal policy). In the real world, it is almost impossible to raise taxes. It makes no sense to assume that Obama, say, can run a deficit now and a surplus later. This would be the optimal policy but it is politically impossible. If one assumes that there is a political limit on future tax increases and spending cuts so all future deficts can’t be reduced to make up for the stimulus, then one should assume that future debt will go up (1+r)^n for one with current deficit spending.

In that case the level of the debt matters. It is still true to quote Krugman that “Zero isn’t an espectially important number” but the social cost of a distortion are convex in that distortion. We will be consuming much more and investing much less than we would if we were not mislead by the illusion of wealth created by public debt. This means an increase in future debt will have a first order welfare cost. If we had a huge public endowement (rainy day fund) then it would create an illusion of poverty and increased deficits would have benefits even if we weren’t in a recession. However, we have a huge public debt, aren’t willing to pay it back and aren’t Ricardian, so, other things equal, adding to the debt is bad for us.

That doesn’t mean we should have no stimulus. It doesn’t even mean we shouldn’t have a larger stimulus. It does mean that the stimulus suggested by Krugman’s simple model is too large and it means that the current level of debt affects the optimal size of the stimulus.

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Medicare advantage. Advantage Democrats

Robert Waldmann

OK so Snowe has broken with the other Republicans.

After a heated hour-long exchange, Democrats defeated a Republican effort to restore $113 billion in funding for Medicare Advantage, a private insurance program that has been criticized for high costs. All 13 Democrats on the committee were joined by one Republican, Sen. Olympia J. Snowe (Maine), in voting against the amendment offered by Sen. Orrin G. Hatch (R-Utah), who was backed by eight other Republicans.

I think the vote on the floor of the senate will be match point.

But why do I have to read an article by Ceci Connolly, Shailagh Murray and Lori Montgomery who are not all, shall we say, reliable friends of Democrats to find this argument.

“Democrats regard the $500 billion in Medicare cost savings as crucial to … the future solvency of the government health insurance program….”

All the reform bills cut Medicare outlays without touching Medicare dedicated revenues. This means that they reduce the Medicare shortfall. When Bush was trying to privatize social security that was just the most important number in Washington. Now it doesn’t exist any more. Now bragging that one is getting from a shortfall of $ 40 trillion to just $ 35 trillion is a bit odd, but if Republicans can argue that a huge Medicare shortfall means they have to change social security pensions in a way which increases the social security shortfall, then surely Democrats can get at least some milage out of a huge reduction in the very huge Medicare shortfall no ?

Evidently not.

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