Economix Blog: Bernanke Defends Stimulus as Necessary and Effective

The Federal Reserve’s chairman, Ben S. Bernanke, picked an unusual time to offer his most recent defense of the Fed’s campaign to stimulate the economy: 7 p.m. on a Friday night in San Francisco, 10 p.m. back home on the East Coast.

The basic message was the same as Mr. Bernanke delivered to Congress earlier this week: The Fed regards its current efforts as necessary and effective, and the risks, while real, are under control.

“Commentators have raised two broad concerns surrounding the outlook for long-term rates,” Mr. Bernanke told a conference at the Federal Reserve Bank of San Francisco. “To oversimplify, the first risk is that rates will remain low, and the second is that they will not.”

If rates remain low, it may drive investors to take excessive risks. If rates jump, investors could lose money – not least the Fed.

Regarding the first possibility, Mr. Bernanke said that the Fed was keeping a careful eye on financial markets. But he noted that rates were low in large part because the economy was weak, and that keeping rates low was the best way to encourage stronger growth. “Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading — ironically enough — to an even longer period of low long- term rates,” he said.

At the other extreme, Mr. Bernanke said the Fed could “mitigate” any jump in rates by prolonging its efforts to hold rates down, for example by keeping some of its investments in Treasury and mortgage-backed securities.

Three more highlights from the question-and-answer session after the speech.

1. Mr. Bernanke, asked about the outlook for the Washington Nationals, responded by accurately quoting the “Las Vegas odds” of a World Series appearance: 8/1.

2. Although the decision may be made under a future chairman, Mr. Bernanke said the Fed should continue to offer “forward guidance” — predicting its policies — even after it concludes its long effort to revive the economy.

“Providing information about the future path of policy could be useful, probably would be useful, under even normal circumstances,” he said in response to a question. “I think we need to keep providing information.”

3. Not surprisingly, Mr. Bernanke often is asked to reflect on the financial crisis. He offered something a little different than his normal response on Friday night.

“In many ways, in retrospect, the crisis was a normal crisis,” he said. “It’s just that the intuitional framework in which it occurred was much more complex.”

In other words, there was a panic, and a run, and a collapse – but rather than a run on bank deposits, the run was in the money markets. Improving the stability of those markets is something regulators have yet to accomplish.

Wealth Matters: Determining if Disability Insurance Is Necessary

One reason is that most people who have it got it through their employer and have given it little thought. Another is that people are not likely to go out and buy it on their own because it is so expensive, the exception being certain occupational groups, like doctors. Yet it does serve an important purpose in replacing a portion of your salary if you get hurt or become sick and are unable to work for several months or more.

Still, figuring out the real risk of becoming disabled is difficult. My colleague Ron Lieber wrote a Your Money column about the various and divergent estimates in 2010.

According to the Social Security Administration, a 20-year-old in 2011 had a 30 percent chance of being disabled for at least six months before retirement. That is a fairly scary statistic, but I couldn’t help thinking it was slightly misleading. After all, someone who moves refrigerators for a living is at greater risk for the most common disability claim — muscular-skeletal injury, according to Sun Life Financial — than someone who works in an office. But the second most common cause for a claim, cancer, doesn’t care what you do for a living.

If you are like me, you also wonder about the likelihood of an insurer paying a disability claim. Will it pay promptly when you submit the proper paperwork or give you the runaround until you give up, as was the case with one insurer, Unum, several years ago?

And to be clear, I am talking about private disability insurance. Anyone who is working and paying into Social Security is eligible to apply for Social Security disability insurance, though the average benefit is only $1,188 a month.

So how do you make an informed decision?

THE COST The first thing anyone who has looked into buying disability insurance has probably been struck by is the cost.

Dallas L. Salisbury, president and chief executive of the Employee Benefit Research Institute, a public policy research group in Washington, said that the cost for coverage in a group policy runs about $16.30 per $1,000 of coverage with a waiting period of 30 days and a maximum benefit of $15,000 a month. For individuals buying their own policies, he said, the cost is $18.60 per $1,000 of coverage but with a 90-day waiting period.

That may seem comparable, but it’s not. The 90-day waiting period is like a higher deductible on your homeowner’s insurance, and it makes the policy considerably cheaper than it would otherwise be. The 90 days is also long enough to eliminate most smaller, short-term claims.

Compare that with the costs for life insurance, which Mr. Salisbury said typically are about 22 cents per $1,000.

Chris Quinn, vice president for the employee group benefits division at Sun Life Financial, said another way to think about it was that the premium was 1 percent of someone’s salary in a group plan and 3.5 percent of that salary in an individual plan.

Mr. Salisbury said that while the number of disability claims had remained constant for decades, the costs remained high because of the small pools of people with disability insurance and the fact that insurance companies might be obliged to make payments for decades.

“The old theory was as soon as fewer people are doing backbreaking work, there will be fewer claims,” Mr. Salisbury said. “But it turns out more people are doing damaging work. Take carpal tunnel syndrome from repetitive usage. Some of the old theories hadn’t contemplated computer keyboards.”

The cost of policies that increase someone’s disability payment above the typical 50 to 60 percent of income is even higher. The reason, Mr. Salisbury and others said, is what is called adverse selection bias: the people most likely to buy additional coverage are likely to have some condition or family history that makes them believe they will need it.

THE CALCULATION The decision for most people on whether to buy an individual policy or add to an employer-sponsored one comes down to a personal risk assessment.

David Ropeik, a consultant and teacher who has written two books about assessing risk, said that when he and his wife had young children and were contemplating buying additional disability insurance, they decided against it.

“We engaged in the process because we were worried about it in the first place,” Mr. Ropeik said. “If we had been more emotionally worried, we would have fantasized about worst-case scenarios. We were fortunate that our incomes could support the other one if something happened.”

But Mr. Ropeik was careful to say that he was not arguing against buying disability insurance. “Our willingness to spend money to defray our worry depends on who we are as individuals,” he said. “It’s not a waste of money if you never collect. You’re buying something. You’re getting a value.”

For some people like Jonathan Skinner, a professor of economics at Dartmouth College who has done research on disability coverage around the world, that value is peace of mind. He said he bought as much additional coverage as he could under the college’s plan.

“As an economist, I’m happiest to insure the things that are rare occurrences that don’t cost much to insure against,” he said. “The disability top-up gives me peace of mind 100 percent of the time.”

This article has been revised to reflect the following correction:

Correction: October 19, 2012

Because of an editing error, an earlier version of this column misidentified the individual who said disability insurance costs remained high because of the small pools of people with such coverage. It was Dallas L. Salisbury of the Employee Benefit Research Institute, not Chris Quinn of Sun Life Financial.