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.
Delegates in Cleveland answer a nightmare question: Would they take four more years of Barack Obama over a Hillary Clinton presidency?
CLEVELAND—It was a question no Republican here wanted to contemplate.
The query alone elicited winces, scoffs, and more than a couple threats of suicide. “I would choose to shoot myself,” one delegate from Texas replied. “You want cancer or a heart attack?” cracked another from North Carolina.
Hillary Clinton and Barack Obama have each been objects of near histrionic derision from Republicans for years (decades in Clinton’s case), but never more so than during the four days of the GOP’s national convention. Republicans onstage at Quicken Loans Arena and in the dozens of accompanying events have accused President Obama of literally destroying the country in his eight years in the White House. Speakers and delegates subjected Clinton to even harsher rhetoric, charging her with complicity in death and mayhem and then repeatedly chanting, “Lock her up!” from the convention floor.
Biology textbooks tell us that lichens are alliances between two organisms—a fungus and an alga. They are wrong.
In 1995, if you had told Toby Spribille that he’d eventually overthrow a scientific idea that’s been the stuff of textbooks for 150 years, he would have laughed at you. Back then, his life seemed constrained to a very different path. He was raised in a Montana trailer park, and home-schooled by what he now describes as a “fundamentalist cult.” At a young age, he fell in love with science, but had no way of feeding that love. He longed to break away from his roots and get a proper education.
At 19, he got a job at a local forestry service. Within a few years, he had earned enough to leave home. His meager savings and non-existent grades meant that no American university would take him, so Spribille looked to Europe.
It’s known as a modern-day hub of progressivism, but its past is one of exclusion.
PORTLAND, Ore.— Victor Pierce has worked on the assembly line of a Daimler Trucks North America plant here since 1994. But he says that in recent years he’s experienced things that seem straight out of another time. White co-workers have challenged him to fights, mounted “hangman’s nooses” around the factory, referred to him as “boy” on a daily basis, sabotaged his work station by hiding his tools, carved swastikas in the bathroom, and written the word “nigger” on walls in the factory, according to allegations filed in a complaint to the Multnomah County Circuit Court in February of 2015.
Pierce is one of six African Americans working in the Portland plant whom the lawyer Mark Morrell is representing in a series of lawsuits against Daimler Trucks North America. The cases have been combined and a trial is scheduled for January of 2017.
There’s a special “debut” category for vice-presidential selections who very suddenly find themselves in the world’s media glare.
VP picks who had mounted serious runs for president don’t quite fit this category. They already knew what it was like to handle big audiences and the press. For example: the elder George Bush became Ronald Reagan’s VP candidate in 1980, but only after running against Reagan in the primary campaign. The same was true of Joe Biden, who had run against Barack Obama (and Hillary Clinton) for the nomination in 2008 before becoming Obama’s running mate, and had run 20 years earlier too. In electoral politics, Dick Cheney had gotten only as far as Wyoming’s seat in Congress when George W. Bush picked him in 2000. But Cheney was already internationally known as Gerald Ford’s White House chief of staff and George H.W. Bush’s Secretary of Defense during the Gulf War.
Why Millennials aren’t buying cars or houses, and what that means for the economy
In 2009, Ford brought its new supermini, the Fiesta, over from Europe in a brave attempt to attract the attention of young Americans. It passed out 100 of the cars to influential bloggers for a free six-month test-drive, with just one condition: document your experience online, whether you love the Fiesta or hate it.
Young bloggers loved the car. Young drivers? Not so much. After a brief burst of excitement, in which Ford sold more than 90,000 units over 18 months, Fiesta sales plummeted. As of April 2012, they were down 30 percent from 2011.
Don’t blame Ford. The company is trying to solve a puzzle that’s bewildering every automaker in America: How do you sell cars to Millennials (a k a Generation Y)? The fact is, today’s young people simply don’t drive like their predecessors did. In 2010, adults between the ages of 21 and 34 bought just 27 percent of all new vehicles sold in America, down from the peak of 38 percent in 1985. Miles driven are down, too. Even the proportion of teenagers with a license fell, by 28 percent, between 1998 and 2008.
A crop of books by disillusioned physicians reveals a corrosive doctor-patient relationship at the heart of our health-care crisis.
For someone in her 30s, I’ve spent a lot of time in doctors’ offices and hospitals, shivering on exam tables in my open-to-the-front gown, recording my medical history on multiple forms, having enough blood drawn in little glass tubes to satisfy a thirsty vampire. In my early 20s, I contracted a disease that doctors were unable to identify for years—in fact, for about a decade they thought nothing was wrong with me—but that nonetheless led to multiple complications, requiring a succession of surgeries, emergency-room visits, and ultimately (when tests finally showed something was wrong) trips to specialists for MRIs and lots more testing. During the time I was ill and undiagnosed, I was also in and out of the hospital with my mother, who was being treated for metastatic cancer and was admitted twice in her final weeks.
Narcissism, disagreeableness, grandiosity—a psychologist investigates how Trump’s extraordinary personality might shape his possible presidency.
In 2006, Donald Trump made plans to purchase the Menie Estate, near Aberdeen, Scotland, aiming to convert the dunes and grassland into a luxury golf resort. He and the estate’s owner, Tom Griffin, sat down to discuss the transaction at the Cock & Bull restaurant. Griffin recalls that Trump was a hard-nosed negotiator, reluctant to give in on even the tiniest details. But, as Michael D’Antonio writes in his recent biography of Trump, Never Enough, Griffin’s most vivid recollection of the evening pertains to the theatrics. It was as if the golden-haired guest sitting across the table were an actor playing a part on the London stage.
“It was Donald Trump playing Donald Trump,” Griffin observed. There was something unreal about it.
Don Johnson won nearly $6 million playing blackjack in one night, single-handedly decimating the monthly revenue of Atlantic City’s Tropicana casino. Not long before that, he’d taken the Borgata for $5 million and Caesars for $4 million. Here’s how he did it.
Don Johnson finds it hard to remember the exact cards. Who could? At the height of his 12-hour blitz of the Tropicana casino in Atlantic City, New Jersey, last April, he was playing a hand of blackjack nearly every minute.
Dozens of spectators pressed against the glass of the high-roller pit. Inside, playing at a green-felt table opposite a black-vested dealer, a burly middle-aged man in a red cap and black Oregon State hoodie was wagering $100,000 a hand. Word spreads when the betting is that big. Johnson was on an amazing streak. The towers of chips stacked in front of him formed a colorful miniature skyline. His winning run had been picked up by the casino’s watchful overhead cameras and drawn the close scrutiny of the pit bosses. In just one hand, he remembers, he won $800,000. In a three-hand sequence, he took $1.2 million.
Fulfilling what might be the Russian autocrat’s dearest wish, Trump has openly questioned whether the U.S. should keep its commitments to NATO.
The Republican nominee for president, Donald J. Trump, has chosen this week to unmask himself as a de facto agent of Russian President Vladimir Putin, a KGB-trained dictator who seeks to rebuild the Soviet empire by undermining the free nations of Europe, marginalizing NATO, and ending America’s reign as the world’s sole superpower.
I am not suggesting that Donald Trump is employed by Putin—though his campaign manager, Paul Manafort, was for many years on the payroll of the Putin-backed former president of Ukraine, Viktor Yanukovych. I am arguing that Trump’s understanding of America’s role in the world aligns with Russia’s geostrategic interests; that his critique of American democracy is in accord with the Kremlin’s critique of American democracy; and that he shares numerous ideological and dispositional proclivities with Putin—for one thing, an obsession with the sort of “strength” often associated with dictators. Trump is making it clear that, as president, he would allow Russia to advance its hegemonic interests across Europe and the Middle East. His election would immediately trigger a wave of global instability—much worse than anything we are seeing today—because America’s allies understand that Trump would likely dismantle the post-World War II U.S.-created international order. Many of these countries, feeling abandoned, would likely pursue nuclear weapons programs on their own, leading to a nightmare of proliferation.
Fractured by internal conflict and foreign intervention for centuries, Afghanistan made several tentative steps toward modernization in the mid-20th century. In the 1950s and 1960s, some of the biggest strides were made toward a more liberal and westernized lifestyle, while trying to maintain a respect for more conservative factions. Though officially a neutral nation, Afghanistan was courted and influenced by the U.S. and Soviet Union during the Cold War, accepting Soviet machinery and weapons, and U.S. financial aid. This time was a brief, relatively peaceful era, when modern buildings were constructed in Kabul alongside older traditional mud structures, when burqas became optional for a time, and the country appeared to be on a path toward a more open, prosperous society. Progress was halted in the 1970s, as a series of bloody coups, invasions, and civil wars began, continuing to this day, reversing almost all of the steps toward modernization taken in the 50s and 60s. Keep in mind, when looking at these images, that the average life expectancy for Afghans born in 1960 was 31, so the vast majority of those pictured have likely passed on since.