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.
Ted Cruz suspends his campaign after losing Indiana, all but assuring the front-runner of the Republican nomination.
“Republican nominee Donald Trump.”
That phrase, once the stuff of fantasy, is now all but set in stone. The entertainer scored a huge victory on Tuesday in Indiana, as Senator Ted Cruz of Texas announced that he was ending his bid for president after being routed in the Hoosier State.
Trump will be the first major-party nominee without prior experience in elected office since General Dwight Eisenhower in 1952. With most of the vote in, Trump was on course to win around a large majority of the state’s 57 delegates. Those numbers, the subject of obsessive calculation and analysis over the last month, have now become somewhat academic. With Cruz out of the race, Trump is effectively assured of winning a majority of the delegates ahead of the July Republican National Convention in Cleveland.
Rampant drug use in Austin, Indiana—coupled with unemployment and poor living conditions—brought on a public-health crisis that some are calling a “syndemic.”
Jessica and Darren McIntosh were too busy to see me when I arrived at their house one Sunday morning. When I returned later, I learned what they’d been busy with: arguing with a family member, also an addict, about a single pill of prescription painkiller she’d lost, and injecting meth to get by in its absence. Jessica, 30, and Darren, 24, were children when they started using drugs. Darren smoked his first joint when he was 12 and quickly moved on to snorting pills. “By the time I was 13, I was a full-blown pill addict, and I have been ever since,” he said. By age 14, he’d quit school. When I asked where his caregivers were when he started using drugs, he laughed. “They’re the ones that was giving them to me,” he alleged. “They’re pill addicts, too.”
The Democratic U.S. presidential candidate secured a win over Hillary Clinton when he desperately needed it.
Updated at 10:30 p.m. Eastern on May 3, 2016
Bernie Sanders just got the victory he desperately needed. The Democratic presidential candidate won in the Indiana Democratic primary on Tuesday, which will give him to the momentum he needs to stay in the race and fight on.
The victory does not not fundamentally change the trajectory of the Democratic race, in which Hillary Clinton holds a commanding lead in the all-important delegate count. But it offers some much-needed enthusiasm to the Sanders campaign at a crucial moment. After a string of defeats in Northeastern primary states last month, Sanders attempted to reframe the terms of the race, suggesting that even if he does not win the White House, he might still claim victory if he can leave a progressive stamp on the Democratic party platform.
Does the presumptive Republican nominee see African Americans and Hispanics as part of the American “we”?
Celebrating his big win in Indiana—and his elevation to presumptive nominee of the Republican Party—Tuesday night, Donald Trump spoke at Trump Tower in New York City, where he delivered a promise to heal the deep fractures in his party.
“We want to bring unity to the Republican Party,” he said. “We have to bring unity. It's so much easier if we have it.”
That will be a tall order. But as a general-election candidate, Trump will need to win over more than just Republicans. In his inimitable way, he pledged to bring together the rest of the nation as well.
“We're going to bring back our jobs, and we're going to save our jobs, and people are going to have great jobs again, and this country, which is very, very divided in so many different ways, is going to become one beautiful loving country, and we're going to love each other, we're going to cherish each other and take care of each other, and we're going to have great economic development and we're not going to let other countries take it away from us, because that's what's been happening for far too many years and we're not going to do it anymore,” he said. (That’s a single sentence, if you’re keeping track at home.)
A professor of cognitive science argues that the world is nothing like the one we experience through our senses.
As we go about our daily lives, we tend to assume that our perceptions—sights, sounds, textures, tastes—are an accurate portrayal of the real world. Sure, when we stop and think about it—or when we find ourselves fooled by a perceptual illusion—we realize with a jolt that what we perceive is never the world directly, but rather our brain’s best guess at what that world is like, a kind of internal simulation of an external reality. Still, we bank on the fact that our simulation is a reasonably decent one. If it wasn’t, wouldn’t evolution have weeded us out by now? The true reality might be forever beyond our reach, but surely our senses give us at least an inkling of what it’s really like.
It’s a paradox: Shouldn’t the most accomplished be well equipped to make choices that maximize life satisfaction?
There are three things, once one’s basic needs are satisfied, that academic literature points to as the ingredients for happiness: having meaningful social relationships, being good at whatever it is one spends one’s days doing, and having the freedom to make life decisions independently.
But research into happiness has also yielded something a little less obvious: Being better educated, richer, or more accomplished doesn’t do much to predict whether someone will be happy. In fact, it might mean someone is less likely to be satisfied with life.
That second finding is the puzzle that Raj Raghunathan, a professor of marketing at The University of Texas at Austin’s McCombs School of Business, tries to make sense of in his recent book, If You’re So Smart, Why Aren’t You Happy?Raghunathan’s writing does fall under the category of self-help (with all of the pep talks and progress worksheets that that entails), but his commitment to scientific research serves as ballast for the genre’s more glib tendencies.
Nearly half of Americans would have trouble finding $400 to pay for an emergency. I’m one of them.
Since 2013,the Federal Reserve Board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?
The billionaire’s bid for the nomination was opposed by many insiders—but his success reveals the ascendance of other elements of the party coalition.
In The Party Decides, an influential book about how presidential nominees are selected, political scientists John Zaller, Hans Noel, David Karol, and Marty Cohen argue that despite reforms designed to wrest control of the process from insiders at smoke-filled nominating conventions, political parties still exert tremendous influence on who makes it to general elections. They do so partly through “invisible primaries,” the authors posited—think of how the Republican establishment coalesced around George W. Bush in 2000, long before any ballots were cast, presenting him as a fait accompli to voters who’d scarcely started to think about the election; or how insider Democrats elevated Hillary Clinton this election cycle.
A claymation video with a grim plot line accompanies a blessedly straightforward if nerve-wracking tune.
Radiohead’s music often works like a puzzle, and it’s not clear whether many people ever solved the one posed by their 2011 album, The King of Limbs, whose funereal swirl only fleetingly provided the beauty and pop payoff that defined the band’s previous work.
Today’s new Radiohead song, “Burn the Witch,” blessedly does not hide its power. Sonically novel yet viscerally moving, gorgeous yet terrifying, it is the sound of Radiohead returning to do what it exists to do. The video is a claymation retelling of The Wicker Man, in which a police officer arrives at a town that is—spoiler alert!—secretly preparing to burn him in a ritual sacrifice. Thom Yorke’s lyrics speak of the kind of mass action and complacency that allows such a crime and, the logic probably goes, many other cruelties committed by societies.
Donald Trump is now the presumptive Republican nominee. How crazy is that?
Well, this is crazy.
Donald Trump is the presumptive Republican nominee—even GOP Chair Reince Priebus says so—and it’s hard to overstate what a bizarre conclusion that is. The litany of reasons is well-worn, but it’s still worth repeating. He was a first-time candidate. He’s repeatedly flirted with running for office, only to back out. His political views were elusive and widely varied, ranging from support for liberal causes to standard pro-business conservatism. When he announced that he was running, back in June 2015, hardly anyone thought he’d really go through with it. They said he’d back out when he had to file financial disclosures, or failing that when campaign faltered. Almost every smart pundit in America—and plenty of not-so-smart ones—declared a Trump presidential campaign dead on arrival. It didn’t hurt that the Republican Party already had a crowded field of young, conservative, charismatic candidates—the strongest in generations, they said.