How Star Wars tells you everything you need to know about the miserable U.S. recovery and the Federal Reserve that has failed to improve it.
(Reuters/Lucasarts/Kasia Cieplak-von Baldegg)
This may not be our darkest hour, but the disappointing May jobs report showed the U.S. economy once again slowing towards stall speed. It's not just the anemic 69,000 jobs the economy added last month. More disconcerting were the sharp downward revisions to previous months. It looks like we could be in for an unwelcome rerun of the summer doldrums we have gotten to know all too well in 2010 and 2011.
Markets have a bad feeling about this. It isn't just about the deteriorating U.S. outlook. Europe and China are turning to the dark side of growth too. The euro is continuing its game of Schrödinger's currency: At any moment it is both saved and doomed. Right now, it's looking more and more doomed. Then there's the slowdown in China -- along with India and Brazil. These economies powered global growth during the dark days of 2008 and 2009, but seem certifiably wobbly now.
The Fed is our last hope -- and there isn't another. Republicans in Congress continue to block further fiscal stimulus, despite historically low borrowing costs and a clear need for better infrastructure. So that leaves Ben Bernanke & Co. as the last and only line of defense. But with short-term interest rates at zero, how much more can the Fed do? What would more quantitative easing accomplish -- and what does that even mean?
In a galaxy far, far away, there wouldn't be any question about whether the Fed could kickstart more growth. That galaxy is called Israel, or Sweden, or Switzerland. Even with zero interest rates, a central bank can increase growth thanks to three things: expectations, expectations, and expectations. Oh, and expectations. But we're getting ahead of ourselves. Let's step back and first consider why critics say the Fed is "out of ammo". Then, we'll explain why that's wrong -- by referring to the ur-text of monetary policy: the script of Star Wars. Really.
IT'S A (LIQUIDITY) TRAP!
A long time ago -- in 2008, to be exact -- monetary policy seemed simple. Central banks raised short-term interest rates when the economy got too hot, and lowered them when it got too cool. The way they did this was simple too. They sold short-term bonds to banks when they wanted to raise rates, and bought short-term bonds from banks when they wanted to lower rates. Central banks got so good at this that the business cycle seemed tamed. Unemployment was low, inflation was lower, and recessions were rare. Economists gave themselves a pat on the back for this self-proclaimed Great Moderation.
That was before the dark times. Before Lehman. Then this tidy little world came crashing down. The shock from the financial crisis was so big that even a zero percent interest rate wasn't enough to turn the economy around. It still isn't. The Fed looks stuck. It can't push nominal rates below zero. What more can it do?
The Fed has tried a new strategy. It has bought long-term bonds. In other words, bonds that still have nonzero interest rates. The idea behind this unconventional easing is the same as for conventional easing: To push up growth by pushing down interest rates -- just on different bonds. These different bonds have mostly been longer-dated Treasures, as well as mortgage-backed securities and agency debt from Fannie Mae and Freddie Mac. Taken together, this rather misunderstood bond-buying goes by the rather unfortunate name of "quantitative easing".
From a certain point of view, quantitative easing is money-printing. From another, it's just an asset swap. Let's think about what this means. Or rather, let's think about where the money for quantitative easing comes from. The magic of central of banking is that the money comes from nowhere. Or whatever the digital equivalent of nowhere is. Remember: Each bank holds a reserve account with the Fed that must meet a certain minimum balance. When the Fed buys longer-dated Treasuries from a bank, it simply creates money and credits the bank's reserve account with this newly-created money. Banks usually only keep the minimum amount in their reserve accounts -- until now, that is. The chart below shows how so-called excess reserves have grown since 2008.
Lots of people don't like this. They worry that this increasing pile of reserves will mean increasing inflation when banks eventually lend them out. Or that this is really just another backdoor bank bailout. Or that this shows that quantitative easing doesn't work.
Let's consider these in turn. First, the Fed has a number of tools to prevent excess reserves from being lent out too quickly. It's actually using one right now, although it really shouldn't be. It pays interest on these reserves. That's right: It pays banks not to lend. So relax, Zimbabwe is not in our future. Second, the Fed doesn't give banks this money for free. The banks give up bonds in return. It's swapping one asset for another. And third, just because so many reserves aren't lent out doesn't mean that quantitative easing accomplishes nothing. If nothing else, it signals that the Fed will not passively watch inflation fall too low. That message matters.
THESE AREN'T THE RATES YOU'RE LOOKING FOR
"These aren't the droids you're looking for." That's what Obi-Wan Kenobi famously tells a trio of less-than-with-it baddies in Star Wars
when -- spoiler alert! -- they actually were the droids they were
looking for. But thanks to the Force, Kenobi convinces them otherwise.
That's a Jedi mind trick -- and it's a pretty decent model for how
central banks can manipulate expectations. Thanks to the printing press,
the Fed can create a self-fulfilling reality. Even with interest rates
Central banks have a strong influence on market expectations. Actually, they have as strong an influence as they want to have. Sometimes they use quantitative easing to communicate what they want. Sometimes they use their words. And that's where monetary policy basically becomes a Jedi mind trick.
The true nature of central banking isn't about interest rates. It's about making and keeping promises. And that brings me to a confession. I lied earlier. Central banks don't really buy or sell short-term bonds when they lower or raise short-term interest rates. They don't need to. The market takes care of it. If the Fed announces a target and markets believe the Fed is serious about hitting that target, the Fed doesn't need to do much else. Markets don't want to bet against someone who can conjure up an infinite amount of money -- so they go along with the Fed.
Don't underestimate the power of expectations. It might sound a like a hokey religion, but it's not. Consider Switzerland. Thanks to the euro's endless flirtation with financial oblivion, investors have piled into the Swiss franc as a safe haven. That sounds good, but a massively overvalued currency is not good. It pushes inflation down to dangerously low levels, and makes exports uncompetitive. So the Swiss National Bank (SNB) has responded by devaluing its currency -- setting a ceiling on its value at 1.2 Swiss francs to 1 euro. In other words, the SNB has promised to print money until its money is worth what it wants it to be worth. It's quantitative easing with a target. And, as Evan Soltas pointed out, the beauty of this target is that the SNB hasn't even had to print money lately, because markets believe it now. Markets have moved the exchange rate to where the SNB wants it.
I FIND YOUR LACK OF A TARGET DISTURBING
I've seen a lot of strange stuff, but nothing quite as strange as the Fed's reluctance to declare a target recently. Rather than announce a target, the Fed announces how much quantitative easing it will do. This is planning for failure. Quantitative easing without a target is more quantitative and less easing. Without an open-ended commitment that shocks expectations, the Fed has to buy more bonds to get less of a result. It's the opposite of what the SNB has done.
Many economists have labored to bring us this knowledge -- including a professor named Ben Bernanke -- and yet the Fed mostly ignores it. I say mostly, because the Fed has said that it expects to keep short-term interest rates near zero through late 2014. But this sounds more radical than it is in reality. It's not a credible promise because it's not even a promise. It's what the Fed expects will happen. So what would be a good way to shift expectations? Let's start with what isn't a good way.
Interest rates can deceive you. Don't trust them. Because most people think the point of quantitative easing is to push down long-term interest rates, they think that any time long-term interest rates fall that it's a form of "stealth quantitative easing". Not so. Consider the chart below from Bloomberg that shows one-year inflation expectations.
Inflation expectations have jumped whenever the Fed has eased. That's not surprising. That's the point of Fed easing. What might be surprising is that sometimes long-term interest rates have fallen when inflation expectations have fallen. In other words, targeting interest rates alone can be misleading. A far better target would be the variable that the Fed ultimately cares about: the total size of the economy. Unfortunately, that kind of regime change is too radical for the Fed now. A second-best policy would be targeting the second-best variables: inflation and unemployment. Chicago Fed president Charles Evans has proposed such a rule, saying the Fed should commit to keeping rates at zero as long as core inflation is below 3 percent or unemployment is above 7 percent. Even better would be to promise to keep doing quantitative easing until the economy hits one of those targets.
EASE OR EASE NOT: THERE IS NO TRY.
The ability to manipulate interest rates is insignificant next to the power of expectations. The latter is never out of ammo, because the Fed can always promise to turn on the printing press and buy stuff until people get the message. It's not magic, but it's the closet thing we have to it. The only reason the Fed has failed so far is that it hasn't been determined to succeed. It's tentatively tried things instead. Switzerland shows that there is another path.
Use the force, Ben. Use the force of inflation expectations.
To many white Trump voters, the problem wasn’t her economic stance, but the larger vision—a multi-ethnic social democracy—that it was a part of.
Perhaps the clearest takeaway from the November election for many liberals is that Hillary Clinton lost because she ignored the working class.
In the days after her shocking loss, Democrats complained that Clinton had no jobs agenda. A widely shared essay in The Nationblamed Clinton's "neoliberalism" for abandoning the voters who swung the election. “I come from the white working class,” Bernie Sanders said on CBS This Morning, “and I am deeply humiliated that the Democratic Party cannot talk to where I came from.”
But here is the troubling reality for civically minded liberals looking to justify their preferred strategies: Hillary Clinton talked about the working class, middle class jobs, and the dignity of work constantly. And she still lost.
Trump's election has reopened questions that have long seemed settled in America—including the acceptability of open discrimination against minority groups.
When Stephen Bannon called his website, Breitbart, the “platform for the alt-right” this summer, he was referring to a movement that promotes white nationalism and argues that the strength of the United States is tied to its ethnic European roots. Its members mostly stick to trolling online, but much of what they do isn’t original or new: Their taunts often involve vicious anti-Semitism. They make it clear that Jews are not included in their vision of a perfect, white, ethno-state.
On the opposite side of American politics, many progressive groups are preparing to mount a rebellion against Donald Trump. They see solidarity among racial minorities as their goal, and largely blame Trump’s election on racism and white supremacy. Three-quarters of American Jews voted against Trump, and many support this progressive vision. Some members of these groups, though, have singled out particular Jews for their collusion with oppressive power—criticisms which range from inflammatory condemnations of Israel to full-on conspiracies about global Jewish media and banking cabals.
The HBO drama’s finale hinted at a dark, meta message.
This post contains spoilers for the season finale of Westworld.
In 2013, a widely cited study published in Science suggested that reading literature increases a person ability to understand other peoples’ emotions. In 2016, another study seemed to debunk it, finding the original study’s results irreplicable and its resulting media coverage way too broad. “Reading Literature Won’t Give You Superpowers,” went The Atlantic’s headline from last week about the reversal.
It might seem laughable in the first place for anyone to think literature bestows superpowers. But that’s actually one of the more abiding beliefs of popular culture, and the question of whether stories improve the soul and mind—and better humanity more broadly—remains eternally in dispute. It’s a question that HBO’s Westworld has riffed on for 10 episodes, with the popular drama’s finale last night suggesting a cynical take on the social value of storytelling.
SNL parodied the president-elect’s impulsive tweeting last weekend, and he responded by tweeting about it.
Saturday Night Live has been on television for nearly 42 years, and in that time, it has mocked seven presidents, with an eighth, Donald Trump, now firmly in its sights. The show’s satire is essentially part of the political scenery; at best, a president might knowingly reference it as a sign of self-awareness. Chevy Chase, in his portrayal of Gerald Ford, mocked the president as clumsy and accident-prone. President Ford did not respond by publicly demonstrating his grace and poise, obeying the old maxim about not protesting too much.
Playing Trump on last weekend’s show, Alec Baldwin mocked the president-elect’s impulse control in a sketch that saw him retweeting random high-school students during a national security briefing. The real Trump was not pleased. “Just tried watching Saturday Night Live - unwatchable! Totally biased, not funny and the Baldwin impersonation just can’t get any worse. Sad,” he tweeted at 12:13 a.m., about halfway through the episode. The irony couldn’t have been more plain: In response to a sketch mocking his propensity for impulsive tweeting, the president-elect ... impulsively tweeted about it. Satire in the age of Trump has already been difficult for Saturday Night Live, but it seems increasingly caught in a feedback loop: Any ridiculous heightening of his behavior is doomed to instant irrelevance by Trump’s reaction to it.
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.
Confronting racism can be crucial, even when it’s not persuasive.
In the brushfire wars since Donald Trump won the presidency, skirmishes over how to speak to his coalition of voters have consumed liberals. Leading the vanguard in those conversations is a collection of writers and thinkers of otherwise divergent views, united by the painful process of reexamining identity politics, social norms, and—most urgently—how to address racism in an election clearly influenced by it. Though earnest and perhaps necessary, their emphasis on the civil persuasion of denizens of "middle America" effectively coddles white people. It mistakes civility for the only suitable tool of discourse, and persuasion as its only end.
This exploration of how to best win over white Americans to the liberal project is exemplified by reactions to Hillary Clinton’s placing many of Donald Trump’s supporters in a “basket of deplorables.” The debate about whether to classify these voters as racist or bigoted for supporting a candidate who constantly evinced views and policies many believe to be bigoted is still raging. As Dara Lind at Vox expertly notes, Clinton’s comments themselves were inartful precisely because they seemed focused solely on “overt” manifestations of racism, like Klan hoods and slurs. That focus ignores the ways in which white supremacy and patriarchy can function as systems of oppression, tends to forgive the more refined and subtle racism of elites, and may ultimately lead to a definition of racism in which no one is actually racist and yet discrimination remains ubiquitous.
Open-web advocates are preparing for a renewed policy war as net neutrality’s future remains uncertain.
Talking about net neutrality is so boring, the comedian John Oliver once quipped, that he would “rather listen to a pair of Dockers tell me about the weird dream it had” than delve into the topic.
So it’s unsurprising that Donald Trump—an entertainer with a flair for the dramatic and little interest in wonky details—has stayed away from the issue almost entirely.
If you want to captivate a nation, discussing thorny telecommunications policy is generally a terrible way to do it. (For those who have managed to avoid reading up on net neutrality thus far, the term refers to open-web principles aimed at curbing practices that give certain companies competitive advantages in how people access the internet. The FCC formally established rules last year that allow the agency to regulate broadband the way it oversees other public utilities. Those rules ban internet service providers from throttling—or slowing—connections to certain content online, and prohibit providers from offering faster connections to corporations that can afford to pay for premium web services. The rules also discourage zero-rating—in which an internet service provider subsidizes a consumer’s cost of going online but often does so in exchange for a competitive advantage.)
Firefighters have now found 36 bodies inside the artist collective where dozens of people lived together.
Rescue workers say 36 people were killed in Oakland, California, in a fire that torched an artist-collective warehouse known locally as the “Ghost Ship.” It may take weeks to identify everyone killed, because the flames have charred some bodies so badly they’ll have to be identified through dental records. The Alameda County Sheriff’s Office has also opened a criminal investigation into what caused the fire. So far, it’s thought to have been an accident—the result of too many people in a place with rampant building-code violations. But already some of the artistic community’s frustration seems aimed at both the warehouse’s artistic leader as well as the Bay Area’s unaffordable rent.
The fire started Friday during a late-night rave being held at the warehouse, home to a couple dozen artists. The blaze grew so quickly that flames and smoke trapped many of the people inside, and forced some to leap out of the second-floor windows. Since firefighters extinguished the flames early Saturday morning, rescue workers have methodically removed bits of ash and debris, putting them in dump trucks to be taken to an offsite location, where they can be sorted and checked in case they contain human remains. It is one of the worst U.S. fires in recent memory, bringing to mind the 2003 blaze in West Warwick, Rhode Island, that killed 100 people at a nightclub called the Station.
Without any promising answer to the problem of fake news, outlandish false claims like a pedophilia ring running out of D.C. restaurant will continue to grow.
After weeks of debate about the theoretical and abstract dangers of fake news, there’s finally a concrete incident to discuss. On Sunday, a North Carolina man walked into Comet Ping Pong, a pizzeria in an affluent corner of Northwest D.C. wielding an assault rifle, which he fired at least once.
The man, 28-year-old Edgar Maddison Welch, told police he intended to “self-investigate” a bogus story alleging that Hillary Clinton was running a pedophilia ring out of the restaurant. The story, dubbed, deplorably, “Pizzagate” has spread around certain fake news circles, culminating in Welch’s expedition to Comet on Sunday.
So much of the discussion about “fake news” has involved vague questions about, for example, whether Russian-backed propaganda could have been a factor in Donald Trump’s victory. A big Washington Post report suggested that Russia had played a role in spreading lots of fake news; Adrian Chen, among others, convincingly argued that one major basis for that report was extremely fraught. There’s a broader question of the extent to which a foreign power could influence the election, and the extent to which that would really be anything new. Jack Shafer suggests not.
What it means, what the law says, and what comes next
Updated on December 5 at 12:50 p.m. ET
Surely some of the protesters believed they would prevail, but among the experts—the law professors, financial analysts, and industry journalists who pride themselves on knowing the ins and outs of federal rules—almost no one expected it. The so-called experts were getting ready to shake their heads and sigh, to lament that once again a federal agency had failed to respond to a historic protest and had failed to protect the most vulnerable.
And then the incredible happened.
On Sunday afternoon, the U.S. Army Corps of Engineers legally blocked the construction of the Dakota Access Pipeline, denying it a needed easement to drill beneath the Missouri River.
The corps will now investigate and write an environmental-impact statement, a roughly two-year process that will assess the risks of building a pipeline so close to the Standing Rock Sioux’s water supply. It will specifically examine whether the pipeline should be moved or cancelled altogether.