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.
A new report details a black market in nuclear materials.
On Wednesday, the Associated Press published a horrifying report about criminal networks in the former Soviet Union trying to sell “radioactive material to Middle Eastern extremists.” At the center of these cases, of which the AP learned of four in the past five years, was a “thriving black market in nuclear materials” in a “tiny and impoverished Eastern European country”: Moldova.
It’s a new iteration of an old problem with a familiar geography. The breakup of the Soviet Union left a superpower’s worth of nuclear weapons scattered across several countries without a superpower’s capacity to keep track of them. When Harvard’s Graham Allison flagged this problem in 1996, he wrote that the collapse of Russia’s “command-and-control society” left nothing secure. To wit:
Also notable about this brazen show of might is that the missiles traveled through two countries, Iran and Iraq, before hitting their 11 targets in Syria. This means that both countries either gave their permission or simply didn’t confront Putin about the use of their airspace on his birthday.
Somewhere in Europe, a man who goes by the name “Mikro” spends his days and nights targeting Islamic State supporters on Twitter.
In August 2014, a Twitter account affiliated with Anonymous, the hacker-crusader collective, declared “full-scale cyber war” against ISIS: “Welcome to Operation Ice #ISIS, where #Anonymous will do it’s [sic] part in combating #ISIS’s influence in social media and shut them down.”
In July, I traveled to a gloomy European capital city to meet one of the “cyber warriors” behind this operation. Online, he goes by the pseudonym Mikro. He is vigilant, bordering on paranoid, about hiding his actual identity, on account of all the death threats he has received. But a few months after I initiated a relationship with him on Twitter, Mikro allowed me to visit him in the apartment he shares with his girlfriend and two Rottweilers. He works alone from his chaotic living room, using an old, battered computer—not the state-of-the-art setup I had envisaged. On an average day, he told me, he spends up to 16 hours fixed to his sofa. He starts around noon, just after he wakes up, and works late into the night and early morning.
It leaves people bed-bound and drives some to suicide, but there's little research money devoted to the disease. Now, change is coming, thanks to the patients themselves.
This past July, Brian Vastag, a former science reporter, placed an op-ed with his former employer, the Washington Post. It was an open letter to the National Institutes of Health director Francis Collins, a man Vastag had formerly used as a source on his beat.
“I’ve been felled by the most forlorn of orphan illnesses,” Vastag wrote. “At 43, my productive life may well be over.”
There was no cure for his disease, known by some as chronic fatigue syndrome, Vastag wrote, and little NIH funding available to search for one. Would Collins step up and change that?
“As the leader of our nation’s medical research enterprise, you have a decision to make,” he wrote. “Do you want the NIH to be part of these solutions, or will the nation’s medical research agency continue to be part of the problem?”
“If the office is going to become a collection of employees not working together, it essentially becomes no different than a coffee shop.”
There’s plenty of research out there on the benefits of remote and flexible work. It’s been shown to lead to increased productivity, and has an undeniable benefit for work-life balance. But what does it do to everyone back at the office?
In a 2013 memo to workers explaining why the company was eliminating policies that allowed remote work, Jackie Reses, Yahoo’s head of human resources,argued that some of the “best decisions and insights come from hallway and cafeteria discussion,” and that actual presence in the office encourages better collaboration and communication.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
National Geographic Magazine has opened its annual photo contest, with the deadline for submissions coming up on November 16, 2015.
National Geographic Magazine has opened its annual photo contest, with the deadline for submissions coming up on November 16, 2015. The Grand Prize Winner will receive $10,000 and a trip to National Geographic headquarters to participate in its annual photography seminar. The kind folks at National Geographic were once again kind enough to let me choose among the contest entries so far for display here. Captions written by the individual photographers.
Forget the Common Core, Finland’s youngsters are in charge of determining what happens in the classroom.
“The changes to kindergarten make me sick,” a veteran teacher in Arkansas recently admitted to me. “Think about what you did in first grade—that’s what my 5-year-old babies are expected to do.”
The difference between first grade and kindergarten may not seem like much, but what I remember about my first-grade experience in the mid-90s doesn’t match the kindergarten she described in her email: three and a half hours of daily literacy instruction, an hour and a half of daily math instruction, 20 minutes of daily “physical activity time” (officially banned from being called “recess”) and two 56-question standardized tests in literacy and math—on the fourth week of school.
That American friend—who teaches 20 students without an aide—has fought to integrate 30 minutes of “station time” into the literacy block, which includes “blocks, science, magnetic letters, play dough with letter stamps to practice words, books, and storytelling.” But the most controversial area of her classroom isn’t the blocks nor the stamps: Rather, it’s the “house station with dolls and toy food”—items her district tried to remove last year. The implication was clear: There’s no time for play in kindergarten anymore.
Why Americans tend more and more to want inexperienced presidential candidates
The presidency, it’s often said, is a job for which everyone arrives unprepared. But just how unprepared is unprepared enough?
Political handicappers weigh presidential candidates’ partisanship, ideology, money, endorsements, consultants, and, of course, experience. Yet they too rarely consider an element of growing importance to voters: freshness. Increasingly, American voters view being qualified for the presidency as a disqualification.
In 2003, I announced in National Journal the 14-Year Rule. The rule was actually discovered by a presidential speechwriter named John McConnell, but because his job required him to keep his name out of print, I graciously stepped up to take credit. It is well known that to be elected president, you pretty much have to have been a governor or a U.S. senator. What McConnell had figured out was this: No one gets elected president who needs longer than 14 years to get from his or her first gubernatorial or Senate victory to either the presidency or the vice presidency.* Surprised, I scoured the history books and found that the rule works astonishingly well going back to the early 20th century, when the modern era of presidential electioneering began.
What will happen to digital collections of books, movies, and music when the tech giants fall?
When you purchase a movie from Amazon Instant Video, you’re not buying it, exactly. It’s more like renting indefinitely.
This distinction matters if your notion of “buying” is that you pay for something once and then you get to keep that thing for as long as you want. Increasingly, in the world of digital goods, a purchasing transaction isn’t that simple.
There are two key differences between buying media in a physical format versus a digital one. First, there’s the technical aspect: Maintaining long-term access to a file requires a hard copy of it—that means, for example, downloading a film, not just streaming from a third party’s server. The second distinction is a bit more complicated, and it has to do with how the law has shaped digital rights in the past 15 years. It helps to think about the experience of a person giving up CDs and using iTunes for music purchases instead.