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.
More on the F-16 and Cessna crash, and whether the collision of a military and a civilian aircraft was also a collision of cultures
Early this month an Air Force F-16, under the command of an experienced Air Force pilot, rammed into a small-civilian Cessna 150 propeller plane, not far from Charleston, South Carolina. The Air Force pilot ejected to safety; both people aboard the Cessna were killed.
The next three paragraphs are background for the pointed and interesting reader-messages I am about to quote. If you’re already up to speed with previous installments (one, two, three), you can skip ahead to the messages. They highlight an aspect of the modern military-civilian divide I had not considered before this episode.
In an original item on the crash, I noted some of the perils civilians could face when flying near designated military areas—even though this crash happened in ordinary uncontrolled airspace. That is, it occurred when neither plane was within a Military Operations Area (MOA), where civilian pilots are warned about risks from high-speed military aircraft, nor inside the controlled “Class C” airspace that surrounds Charleston’s airport. (Medium-sized commercial airports like Charleston’s typically are ringed by Class C airspace, so the controllers can sequence in the airline, cargo, civilian, military, and other traffic headed toward their runways. The very busiest airports, like LAX or JFK, are surrounded by larger zones of Class B airspace for their more complex traffic-control jobs. In case you’re wondering, Class A airspace is the realm above 18,000 feet where most jet travel occurs.)
A newly discovered artifact buried with one of Jamestown’s most prominent leaders suggests he could have been a crypto-Catholic.
After 400 years in the Virginia dirt, the box came out of the ground looking like it had been plucked from the ocean. A tiny silver brick, now encrusted with a green patina and rough as sandpaper. Buried beneath it was a human skeleton. The remains would later be identified as those of Captain Gabriel Archer, one of the most prominent leaders at Jamestown, the first permanent English colony in America. But it was the box, which appeared to be an ancient Catholic reliquary, that had archaeologists bewildered and astonished.
“One of the major surprises was the discovery of this mysterious small silver box,” said James Horn, the president of the Jamestown Rediscovery Foundation. “I have to say, we’re still trying to figure this out. You have the very strange situation of a Catholic reliquary being found with the leader of the first Protestant church in the country.”
The paper of record’s inaccurate reporting on a nonexistent criminal investigation was a failure that should entail more serious consequences.
I have read The New York Times since I was a teenager as the newspaper to be trusted, the paper of record, the definitive account. But the huge embarrassment over the story claiming a criminal investigation of Hillary Clinton for her emails—leading the webpage, prominent on the front page, before being corrected in the usual, cringeworthy fashion of journalists who stonewall any alleged errors and then downplay the real ones—is a direct challenge to its fundamental credibility. And the paper’s response since the initial huge error was uncovered has not been adequate or acceptable.
This is not some minor mistake. Stories, once published, take on a life of their own. If they reinforce existing views or stereotypes, they fit perfectly into Mark Twain’s observation, “A lie can travel halfway around the world while the truth is putting on its shoes.” (Or perhaps Twain never said it, in which case the ubiquity of that attribution serves to validate the point.) And a distorted and inaccurate story about a prominent political figure running for president is especially damaging and unconscionable.
The new version of Apple’s signature media software is a mess. What are people with large MP3 libraries to do?
When the developer Erik Kemp designed the first metadata system for MP3s in 1996, he provided only three options for attaching text to the music. Every audio file could be labeled with only an artist, song name, and album title.
Kemp’s system has since been augmented and improved upon, but never replaced. Which makes sense: Like the web itself, his schema was shipped, good enough,and an improvement on the vacuum which preceded it. Those three big tags, as they’re called, work well with pop and rock written between 1960 and 1995. This didn’t prevent rampant mislabeling in the early days of the web, though, as anyone who remembers Napster can tell you. His system stumbles even more, though, when it needs to capture hip hop’s tradition of guest MCs or jazz’s vibrant culture of studio musicianship.
Has the Obama administration’s pursuit of new beginnings blinded it to enduring enmities?
“The president said many times he’s willing to step out of the rut of history.” In this way Ben Rhodes of the White House, who over the years has broken new ground in the grandiosity of presidential apologetics, described the courage of Barack Obama in concluding the Joint Comprehensive Plan of Action with the Islamic Republic of Iran, otherwise known as the Iran deal. Once again Rhodes has, perhaps inadvertently, exposed the president’s premises more clearly than the president likes to do. The rut of history: It is a phrase worth pondering. It expresses a deep scorn for the past, a zeal for newness and rupture, an arrogance about old struggles and old accomplishments, a hastiness with inherited precedents and circumstances, a superstition about the magical powers of the present. It expresses also a generational view of history, which, like the view of history in terms of decades and centuries, is one of the shallowest views of all.
Orr: “Sometimes a thing happens. Splits your life. There’s a before and after. I got like five of them at this point.”
This was Frank offering a pep talk to the son of his murdered former henchman Stan in tonight’s episode. (More on this in a moment.) But it’s also a line that captures this season of True Detective so perfectly that it almost seems like a form of subliminal self-critique.
Remember when Ray got shot in episode two and appeared to be dead but came back with a renewed sense of purpose and stopped drinking. No? That’s okay. Neither does the show: It was essentially forgotten after the subsequent episode. Remember when half a dozen (or more) Vinci cops were killed in a bloody shootout along with dozen(s?) of civilians? No? Fine: True Detective’s left that behind, too. Unless I missed it, there was not a single mention of this nationally historic bloodbath tonight.
The agreement doesn’t guarantee that Tehran will never produce nuclear weapons—because no agreement could do so.
A week ago I volunteered my way into an Atlantic debate on the merits of the Iran nuclear agreement. The long version of the post is here; the summary is that the administration has both specific facts and longer-term historic patterns on its side in recommending the deal.
On the factual front, I argued that opponents had not then (and have not now) met President Obama’s challenge to propose a better real-world alternative to the negotiated terms. Better means one that would make it less attractive for Iran to pursue a bomb, over a longer period of time. Real world means not the standard “Obama should have been tougher” carping but a specific demand that the other countries on “our” side, notably including Russia and China, would have joined in insisting on, and that the Iranians would have accepted.
U.S. officials are turning to Russia for help with Iran and Syria, even as the Ukrainian conflict persists.
If you believe all the talk out there lately, Vladimir Putin is not only duplicitous and hypocritical—the Russian president’s also been pretty damn busy recently. Busy cutting secret deals with the same Europeans and Americans he has been vilifying for years. And if you believe the rumors, the Europeans and Americans have also been busy selling out Ukraine to the Russians.
Not that any of this would be unusual or particularly surprising. Cynicism, duplicity, and hypocrisy are often the reserve currencies of politics, where interests tend to trump values.
There have long been suspicions that the United States and Europe might give Ukraine up in exchange for Russia’s support in securing a deal to curb Iran’s nuclear program. Additionally, Washington has been seeking Moscow’s backing in securing a managed, orderly, and negotiated exit for Syrian leader Bashar al-Assad, which would go a long way toward ending the conflict in that country.
Even with the overwhelming recent New York cover story, the women pay a price for speaking out.
Who still defends Bill Cosby? After newly unsealed depositions revealed that the comedian admitted to acquiring sedatives to give to women he wanted to have sex with, his longstanding backer Whoopi Goldberg recanted her support for the man accused of dozens of rapes over the years. The singer Jill Scott, too, said she was wrong when she suspected a media conspiracy against him. And if Cosby’s former costars, including Phylicia Rashad, still believe him to be the target of an illegitimate smear campaign, they haven’t spoken up to say so in a while. Cosby’s lawyer is currently making the rounds in the media to say his deposition has been misconstrued—but that argument, even if believed, doesn’t refute the idea that he used drugs to take advantage of women.