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.
An etiquette update: Brevity is the highest virtue.
I recently cut the amount of time I spent on email by almost half, and I think a lot of people could do the same.
I’m sure my approach has made some people hate me, because I come off curt. But if everyone thought about email in the same way, what I’m suggesting wouldn’t be rude. Here are the basic guidelines that are working for me and, so, I propose for all of the world to adopt immediately:
Best? Cheers? Thanks?
None of the above. You can write your name if it feels too naked or abrupt not to have something down there. But it shouldn’t, and it wouldn’t if it were the norm.
Don’t waste time considering if “Dear,” or “Hey” or “[name]!” is appropriate. Just get right into it. Write the recipient’s name if you must. But most people already know their names. Like they already know your name.
The Commission on Presidential Debates issued a cryptic statement acknowledging some audio issues Monday night.
After critics savaged his performance at Monday’s first presidential debate, Republican nominee Donald Trump alighted on several culprits: Hillary Clinton, the moderator, and especially his microphone.
The claim was met with some skepticism, but on Friday afternoon, the Commission on Presidential Debates seemed to confirm his claim, at least in part. The commission, which controls the debates, released a cryptic statement that reads in full:
Statement about first debate
Sep 30, 2016
Regarding the first debate, there were issues regarding Donald Trump's audio that affected the sound level in the debate hall.
We’ve called the commission to ask what that means, but have not heard back yet. Presumably, they are receiving dozens of such queries.
With the death of Shimon Peres, Israel has lost its chief optimist. And the prime minister remains paralyzed by pessimism.
The Book of Proverbs teaches us that where there is no vision, the people perish. The people of Israel, now bereft of Shimon Peres, will not perish, because survival—or, at least, muddling through—is a Jewish specialty. But the death of Israel’s greatest visionary, a man who understood that it would never be morally or spiritually sufficient for the Jews to build for themselves the perfect ghetto and then wash their hands of the often-merciless world, means that Israel has lost its chief optimist.
Peres was, for so many years, a prophet without honor in his own country, but he was someone who, late in life, came to symbolize Israel’s big-hearted, free-thinking, inventive, and democratic promise. Peres came to this role in part because he had prescience, verbal acuity, a feel for poetry, and a restless curiosity, but also because, gradually but steadily, he became surrounded by small men. One of the distressing realities of Israel today is that, in so many fields—technology, medicine, agriculture, literature, music, cinema—the country is excelling. But to Israeli politics go the mediocrities.
Business students are not agreeable, art students are neurotic, and other findings from a recent meta-analysis.
They say it doesn't matter what you major in during college. It might matter, however, if you want your personality to match your chosen field—lest you end up the lone nod-greeter in a marketing class full of exploding fistbumps.
According to a new meta-analysis, there are significant personality differences between students in different academic majors. For the review paper, Anna Vedel, a psychologist from Aarhus University in Denmark, analyzed 12 studies examining the correlation between personality traits and college majors. Eleven of them found significant differences between majors. The review examined the so-called “Big Five” traits: neuroticism, extraversion, openness to experience, agreeableness, and conscientiousness.
Lawmakers overrode an Obama veto for the first time on Wednesday. A day later, they already had regrets.
The enactment on Wednesday of the Justice Against Sponsors of Terrorism Act should have been a triumphant moment for Republican leaders in Congress. They had succeeded, after years of trying, in overriding a presidential veto for the first time and forcing a bill into law over the strenuous objections of Barack Obama.
But the morning after brought no such celebration for HouseSpeaker Paul Ryan and Senate Majority Leader McConnell—only pangs of regret.
“It appears as if there may be some unintended ramifications,” McConnell lamented at a press conference barely 24 hours after all but one senator voted to reject the president’s veto of the legislation, which would allow victims of the September 11, 2001 terrorist attacks to sue Saudi Arabia in U.S. court. On the other side of the Capitol, Ryan said that he hoped there could be a “fix” to the very law he allowed to pass through the House—one that would protect U.S. soldiers abroad from legal retribution that the Obama administration had warned for months would follow as a result of the law.
It's natural for humans to pay attention to all their romantic options, and new research shows Facebook helps them do that.
One episode in season five of How I Met Your Mother, called “Hooked,” revolves around people being kept “on the hook,” romantically speaking, by members of the show’s central gang of friends. “I can’t be with you … right now” is the phrase the pals keep using to string these people along, the “right now” leaving the door cracked open just enough that apparently some poor guy is willing to continue to do Robin’s laundry and rub her feet for the vague possibility of a someday relationship.
This does not make the friends look very good, obviously, but keeping track of and keeping in touch with alternative romantic prospects is a common thing for humans to do, even if it is rarely in such an exaggerated, sitcommy way. A recent study published in Computers in Human Behavior dubs these interactions “backburner relationships." A backburner, as defined by the study, is “a person to whom one is not presently committed, and with whom one maintains some degree of communication, in order to keep or establish the possibility of future romantic and/or sexual involvement.”
The Trump Foundation mostly takes in other people’s money, but it appears it doesn’t have legal permission to solicit donations.
The problem with telling people to follow the money is they just might take you up on it. Donald Trump’s campaign has adopted that mantra in reference to the Clinton Foundation, but it applies to him in uncomfortable ways, too.
First, there’s the fact that he won’t release his tax returns, making it hard to follow the money and raising questions about what might be hidden there. Second, there are his forays into Cuba, apparently in violation of the embargo. Third, there’s the latest scoop from The Washington Post’s David Fahrenthold, who finds that the Donald J. Trump Foundation was operating without a required license.
As Fahrenthold previously reported, the Trump Foundation is peculiar: Unlike many other similar charities, it’s stocked with other people’s money. Trump himself has given barely any money to it since the mid-2000s, although he did direct income from places like Comedy Central to the charity, possibly without paying taxes on it. Instead, he has raised money from other donors, which he has used to, among other things, settle legal cases against him, all while basking in the glow of his apparent charity.
Despite an array of calculating tools, comparing financial-aid packages is still an incredibly dense and circular process.
As almost any parent of a high-school senior knows, figuring out the true college price tag is confusing. While the full annual sticker price can be as much as $60,000 or $70,000 at a private college and more than $55,000 at an out-of-state public college, experts say that many students will end up paying considerably less. Sizable merit and need-based aid packages take the sting out of those big numbers.
Students, however, typically have to wait until the spring, when their acceptance letters arrive, to learn the amount of those awards, making it difficult for families to effectively plan a long-term budget and posing significant obstacles for first-generation students who may not be aware of all the financial options.
After Andrea Wulf won the Royal Society’s highest honor for her book The Invention of Nature, a writer at The Guardian attributed it to a new fondness for “female-friendly” biographies among prize juries.
Last week, the Royal Society held its ceremony to honor the best popular-science book of the year. I was there, having had the good fortune to be one of the finalists for my recent book, The Hunt for Vulcan. I didn’t expect to win—partly because of my baseline pessimism, partly because of the strength of the competition, and partly because I had set out to write a kind of miniature, a brief book on a quirky topic. Whatever the reason, I was right: I didn’t.
The event itself was good fun. Each of the authors read a passage from their work; the head judge for the prize, author Bill Bryson, led us in a brief question-and-answer session, in which we compared notes on what moved us to write about science. Then came the moment of truth. Venkatraman Ramakrishnan, the president of the Royal Society, approached the podium, opened the envelope, and announced that Andrea Wulf had won for The Invention of Nature.