The fiscally conservative case to borrow and spend -- and feel good about it
What if borrowing money made you so much richer over the long-term that it paid for itself? It's not crazy. Millions of families make such a decision every year when they take on debt to pay for school. Indeed, investing in yourself is a bet that often pays off. But can the same be true for an entire country?
Brad DeLong and Larry Summers say yes. In a provocative new paper, they argue that when the economy is depressed like today, government spending can be a free lunch. It can pay for itself.
It's a fairly simple story. With interest rates at zero, the normal rules do not apply. Government spending can put people back to work and prevent the long-term unemployed from becoming unemployable. This last point is critical. If people are out of work for too long, they lose skills, which makes employers less likely to hire them, which makes them lose even more skills, and so on, and so on. Even when the economy fully recovers, these workers will stay on the sidelines. It's not just these workers who suffer from being out of work. We all do. High unemployment is a symptom of a collapse in investment. If we don't make needed investments now, that will put a brake on growth down the line. Together, economists call these twin menaces hysteresis. And if it sets in, it reduces how much we can do and make in the future. Assuming that spending now can forestall hysteresis, then this spending might be self-financing. In other words, spending now might "cost" us less than not acting.
This doesn't mean that government spending is magic. Often, it's anything but. But this is a special case. DeLong and Summers identify three factors that determine whether fiscal stimulus will pay for itself: 1) how much hysteresis hurts future output, 2) the inflation-adjusted interest rate, and 3) the size of the fiscal multiplier. Let's consider these in turn.
THE MONSTER OF HYSTERESIS
Economists know a lot about a lot of things. Hysteresis is not one of them.
Indeed, it's not clear whether long-term unemployment and investment shortfalls really do damage potential growth over the really long-term. Maybe hysteresis "only" wounds us for the next 20 years, but not the next 40 years. Unfortunately, there's reason to fear that this is optimistic. A recent paper by Stephen Davis and Till von Wachter finds that workers who are laid off during recessions -- who presumably take longer to find a new job -- take worse hits to their lifetime earnings than do workers who are laid off during good times. Lasting unemployment has lasting consequences. That should terrify our policymakers.
The below chart from DeLong and Summers shows the unemployment rate versus the percentage of working-age people who are actually working. Any divergence between the two shows us how many people have given up on trying to find a job after being out of work for too long. The recent numbers paint a frightening picture.
While quantifying just how much this will hurt our long-term productive capacity is a matter of guesswork, DeLong and Summers show that it doesn't have to be much to justify doing something now -- provided that rock bottom interest rates super-charge fiscal stimulus.
DeLong and Summers argue that real rates -- that is, adjusted for inflation -- don't have to be that low to make more spending a good deal. They calculate that real rates of anywhere between three and seven percent make fiscal stimulus worthwhile. Inflation-adjusted rates are negative now. But low rates don't only make borrowing cheaper. They might also make government spending more effective.
STIMULUS THAT WORKS: A BLACK SWAN, NOT A UNICORN
Government spending usually doesn't increase growth. Or, as economists put it, "the fiscal multiplier is usually close to zero." The multiplier just refers to how much total spending a dollar of government spending generates. For instance, if the government spends $1 billion and GDP goes up by $1.5 billion, then the multiplier would be 1.5. In normal times, the multiplier is zero, because the Federal Reserve offsets any additional spending. The Fed has its inflation target, and if more government spending pushes up inflation, then the Fed neutralizes it by raising interest rates. But with short-term rates hugging zero and inflation falling below target, this calculus might change. The Fed might allow the multiplier to be greater than one. And that would certainly make more spending a very good deal.
There are two broad objections to the notion that the fiscal multiplier might be quite high right now. First, just because short-term interest rates are at zero doesn't mean the Fed is out of ammunition. The Fed can still buy long-term bonds -- aka quantitative easing -- or tell markets that it will keep short-term rates low for an extended period. These things matter. If fiscal stimulus precludes the Fed from doing more monetary stimulus, then the apparent multiplier will be misleading. Second, it's hard to find many historical examples of a high fiscal multiplier. Critics like to point out that even during World War II -- when interest rates were also negligible -- that the multiplier was no better than during normal times. So, after all of this, does this mean that government spending isn't worth it?
Not so fast. Just because the Fed can use unconventional policy doesn't mean that fiscal stimulus is a waste. Much of the Fed's current strategy involves making (quasi) promises to keep rates low for a long time -- till late 2014, to be exact. It's a very watered down version of what Paul Krugman called "credibly promising to be irresponsible". The problem, though, is credibility. Markets might not believe the Fed. Actually, they don't. And that means that spending wouldn't be canceled out nearly as much right now. As for past instances of a high multiplier, World War II actually does offer solid evidence. You just need to know when to look. While we were actively fighting in the war, the government imposed private sector rationing. So it's hardly surprising that government spending didn't spur on private spending when the private sector was forbidden from spending. But here's an oft-forgotten fact: we started spending on the war long before we entered the war -- to help arm Great Britain. Those were our "arsenal of democracy" days. More importantly, there was no rationing from 1939-41. Over this period Robert Gordon and Robert Krenn found that the multiplier was as high as 1.8. That's really, really good.
The Cliff Notes version of all of this is that a fiscal multiplier greater than one is not a unicorn. It's more like a black swan. It exists. It's just rare. And this looks like one of those rare times. Taken together with our historically low rates, now seems like a great time to make some investments in ourselves. Putting the long-term unemployed back to work is an investment in their human capital. Refurbishing roads and bridges is an investment in the physical infrastructure we need to keep competing globally. Both make us better off in the long run, and could conceivably pay for themselves. Of course, none of the above means that the Fed can't or shouldn't try to do more. It's more of a practical appraisal about what the Fed will -- and won't -- do.
Usually comparing the government's budget to a family's budget is a bad idea. Governments can borrow for far longer and on far better terms. And, counterfeiters aside, families can't print money. But in this case it's a worthwhile comparison. A family struggling to make ends meet wouldn't be wise to save money by pulling their kids out of college if they can afford tuition. Similarly, governments running massive deficits during a depression wouldn't be wise to embrace austerity if markets will lend to them on favorable terms. In both cases, the long-term damage outweighs any short-term benefit.
Which is to say: When people offer you free money, don't say no.
Orr: “It’s a pleasure to meet you, Your Grace. My name is Tyrion Lannister.”
At last! I know I speak for quite a few book readers when I say that pretty much the only thing that kept me going through the eleventy thousand discursive, digressive pages of George R. R. Martin’s fifth tome, A Dance With Dragons, was the promise of Tyrion finally meeting up with Daenerys Targaryen. And, of course, after eleventy thousand pages, it never happened. So on behalf of myself and everyone else who sacrificed sleep, work, family, and friends waiting for this moment, let me say thank you, David Benioff and D. B. Weiss. Bonus points for what seemed to be a cameo by Strong Belwas (a book character who was written out of the show) as the nameless fighter who freed Tyrion from his chains.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
Some fans are complaining that Zack Snyder’s envisioning of the Man of Steel is too grim—but it’s less a departure than a return to the superhero’s roots.
Since the official teaser trailer for Batman v Superman: Dawn of Justice debuted online in April, fans and critics alike have been discussing the kind of Superman Zack Snyder is going to depict in his Man of Steel sequel. The controversy stems from Snyder’s decision to cast Superman as a brooding, Dark Knight-like character, who cares more about beating up bad guys than saving people. The casting split has proved divisive among Superman fans: Some love the new incarnation, citing him as an edgier, more realistic version of the character.
But Snyder’s is a different Superman than the one fans grew up with, and many have no problem expressing their outrage over it. Even Mark Waid, the author of Superman: Birthright (one of the comics the original film is based on), voiced his concern about Man of Steel’s turn toward bleakness when it came out in 2013:
The country’s political dysfunction has undermined all efforts to build an effective fighting force.
The Obama Administration has run out of patience with Iraq’s Army. On Sunday, Secretary of Defense Ashton Carter appeared on CNN’s “State of the Union” to discuss the recent fall of Ramadi, one of Iraq’s major cities, to ISIS. Despite possessing substantial advantages in both numbers and equipment, he said, the Iraqi military were unable to prevent ISIS forces from capturing the city.
“That says to me and, I think, to most of us, that we have an issue with the will of the Iraqis to fight ISIL and defend themselves.”
Carter’s frustrations are shared by his boss. When asked about the war against ISIS in a recent interview with the Atlantic’s Jeffrey Goldberg, President Obama said that “if the Iraqis are not willing to fight for the security of their country, then we cannot do it for them.”
New research confirms what they say about nice guys.
Smile at the customer. Bake cookies for your colleagues. Sing your subordinates’ praises. Share credit. Listen. Empathize. Don’t drive the last dollar out of a deal. Leave the last doughnut for someone else.
Sneer at the customer. Keep your colleagues on edge. Claim credit. Speak first. Put your feet on the table. Withhold approval. Instill fear. Interrupt. Ask for more. And by all means, take that last doughnut. You deserve it.
Follow one of those paths, the success literature tells us, and you’ll go far. Follow the other, and you’ll die powerless and broke. The only question is, which is which?
Of all the issues that preoccupy the modern mind—Nature or nurture? Is there life in outer space? Why can’t America field a decent soccer team?—it’s hard to think of one that has attracted so much water-cooler philosophizing yet so little scientific inquiry. Does it pay to be nice? Or is there an advantage to being a jerk?
Changing neighborhoods may be a class issue, but in America, that means it's also a racial one.
Ask city-dwellers to describe what, precisely, gentrification is you’ll get an array of answers. The term is a murky one, used to describe the many different ways through which money and development enter poorer or less developed neighborhoods, changing them both economically and demographically.
For some, gentrification and gentrifiers are inherently bad—pushing out residents who are often older, poorer, and darker than the neighborhood’s new occupants. For others, a new group of inhabitants brings the possibility of things residents have long hoped for, better grocery stores, new retail, renovations, and an overall revitalization that often eludes low-income neighborhoods.
Rebel groups that employ terror in civil wars seldom win or gain concessions—but they tend to prolong conflicts, a new paper finds.
Nearly 14 years into the war on terror, there are signs of terrorism all around us, from Memorial Day tributes to the victims of the wars in Iraq and Afghanistan to the raging congressional debate over reauthorizing the Patriot Act.
Yet some of the most basic information about terrorism remains surprisingly elusive. For example: Does it work?
There have been some attempts at answering the question, but many of them are either largely anecdotal or geographically constrained. Other studies have focused on international terror. But as political scientist Page Fortna of Columbia University notes, the vast majority of terrorism isn’t transnational—it’s localized, utilized in the context of civil wars and fights for territorial control. Many of the intractable conflicts the U.S. is involved in today fit this definition: the fighting between ISIS, Jabhat al-Nusra, and other groups in Iraq and Syria; the Boko Haram insurgency in Nigeria; al-Shabab’s terrorism in Somalia and Kenya; Yemen’s civil war; the Israel-Palestinian conflict. Is terrorism an effective tool when used in those conflicts?
In an interview, the U.S. president ties his legacy to a pact with Tehran, argues ISIS is not winning, warns Saudi Arabia not to pursue a nuclear-weapons program, and anguishes about Israel.
On Tuesday afternoon, as President Obama was bringing an occasionally contentious but often illuminating hour-long conversation about the Middle East to an end, I brought up a persistent worry. “A majority of American Jews want to support the Iran deal,” I said, “but a lot of people are anxiety-ridden about this, as am I.” Like many Jews—and also, by the way, many non-Jews—I believe that it is prudent to keep nuclear weapons out of the hands of anti-Semitic regimes. Obama, who earlier in the discussion had explicitly labeled the supreme leader of Iran, Ayatollah Ali Khamenei, an anti-Semite, responded with an argument I had not heard him make before.
“Look, 20 years from now, I’m still going to be around, God willing. If Iran has a nuclear weapon, it’s my name on this,” he said, referring to the apparently almost-finished nuclear agreement between Iran and a group of world powers led by the United States. “I think it’s fair to say that in addition to our profound national-security interests, I have a personal interest in locking this down.”
Think that these odd finger-shoes are "bullshit"? Think again.
I gather that there is much gleeful stomping on the grave image of Vibram and the weirdo/chic "finger shoes" it has popularized, because the company has settled a suit claiming the shoes offered no health benefits. That's me and one of my sons, modeling Vibram shoes, in the picture above. I'll let you figure out the extremities.
That picture comes from four years ago. I'd been running regularly for many decades before that, but since the early 2000s I'd been vexed by one wear-and-tear problem after another. Never involving the knees, miraculously; most frequently afflicting the Achilles tendons.
Then, as I shifted to Vibram shoes, I also shifted to what has been (again miraculously) a multi-year stint of injury-free running. True, my change of footwear coincided with some other injury-buffering changes: Always taking at least a day off between runs. Opting for rubberized tracks rather than hard paved roads. Stopping as soon as something started to hurt, rather than "running through" the distress; and generally acting like a senior-status wimp.