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.
Black poverty is fundamentally distinct from white poverty—and so cannot be addressed without grappling with racism.
There have been a number of useful entries in the weeks since Senator Bernie Sanders declared himself against reparations. Perhaps the most clarifying comes from Cedric Johnson in a piece entitled, “An Open Letter To Ta-Nehisi Coates And The Liberals Who Love Him.” Johnson’s essay offers those of us interested in the problem of white supremacy and the question of economic class the chance to tease out how, and where, these two problems intersect. In Johnson’s rendition, racism, in and of itself, holds limited explanatory power when looking at the socio-economic problems which beset African Americans. “We continue to reach for old modes of analysis in the face of a changed world,” writes Johnson. “One where blackness is still derogated but anti-black racism is not the principal determinant of material conditions and economic mobility for many African Americans.”
Most people in the U.S. believe their country is going to hell. But they’re wrong. What a three-year journey by single-engine plane reveals about reinvention and renewal.
When news broke late last year of a mass shooting in San Bernardino, California, most people in the rest of the country, and even the state, probably had to search a map to figure out where the city was. I knew exactly, having grown up in the next-door town of Redlands (where the two killers lived) and having, by chance, spent a long period earlier in the year meeting and interviewing people in the unglamorous “Inland Empire” of Southern California as part of an ongoing project of reporting across America.
Some of what my wife, Deb, and I heard in San Bernardino before the shootings closely matched the picture that the nonstop news coverage presented afterward: San Bernardino as a poor, troubled town that sadly managed to combine nearly every destructive economic, political, and social trend of the country as a whole. San Bernardino went into bankruptcy in 2012 and was only beginning to emerge at the time of the shootings. Crime is high, household income is low, the downtown is nearly abandoned in the daytime and dangerous at night, and unemployment and welfare rates are persistently the worst in the state.
As Coldplay blandly strained for the universal, she and Bruno Mars pulled off something more specific and more daring.
What a perfect Beyoncésong name: “Formation.” All great pop involves people acting in formation. So does all great change. And while fans scream that Beyoncé’s a “queen” and “goddess,” her core appeal really is as a drill sergeant. With Beyoncé in command, greatness is scalable, achievable, for the collective. Everyone waves their hands to the same beat. Everyone walks around like they have hot sauce in their bag.
But in pop and in politics, “everyone” is a loaded term. Stars as ubiquitous as Beyoncé have haters, the “albino alligators” who “Formation” informs us she twirls upon. And in a more general historical sense, “everyone” can be a dangerous illusion that elevates one point of view as universal while minimizing others. Beyoncé gets all of this, it seems. As a pop star, she surely wants to have as broad a reach as possible. But as an artist, she has a specific message, born of a specific experience, meaningful to specific people. Rather than pretend otherwise, she’s going to make art about the tension implied by this dynamic. She’s going to show up to Super Bowl with a phalanx of women dressed as Black Panthers.
The number of American teens who excel at advanced math has surged. Why?
On a sultry evening last July, a tall, soft-spoken 17-year-old named David Stoner and nearly 600 other math whizzes from all over the world sat huddled in small groups around wicker bistro tables, talking in low voices and obsessively refreshing the browsers on their laptops. The air in the cavernous lobby of the Lotus Hotel Pang Suan Kaew in Chiang Mai, Thailand, was humid, recalls Stoner, whose light South Carolina accent warms his carefully chosen words. The tension in the room made it seem especially heavy, like the atmosphere at a high-stakes poker tournament.
Stoner and five teammates were representing the United States in the 56th International Mathematical Olympiad. They figured they’d done pretty well over the two days of competition. God knows, they’d trained hard. Stoner, like his teammates, had endured a grueling regime for more than a year—practicing tricky problems over breakfast before school and taking on more problems late into the evening after he completed the homework for his college-level math classes. Sometimes, he sketched out proofs on the large dry-erase board his dad had installed in his bedroom. Most nights, he put himself to sleep reading books like New Problems in Euclidean Geometry and An Introduction to Diophantine Equations.
Many are familiar with the challenges faced by working moms, but the troubles of women with aging parents are unseen and widely ignored.
For America’s working moms, there is pretty much an endless stream of resources to guide and comfort them on how to tell the boss they’re pregnant, how to find a private place to pump at work, how to negotiate flex time, how to split the chores at home, and whether or not to display pictures of their kids at the office. They can read all day and all night about the many stresses of working motherhood including pregnancy discrimination, the wage gap, the mommy wars, leaning in, and opting out. But for America’s working daughters, there is little to help them navigate between their careers and the needs of their aging parents.
There are currently 44 million unpaid eldercare providers in the United States according to the U.S. Census Bureau and the majority are women. And yet there are very few support programs, formal or informal, in place to support these family caregivers, many of whom are struggling at work and at home. Working daughters often find they need to switch to a less demanding job, take time off, or quit work altogether in order to make time for their caregiving duties. As a result, they suffer loss of wages and risk losing job-related benefits such as health insurance, retirement savings, and Social Security benefits. In fact, a study from MetLife and the National Alliance for Caregiving calculated women lose an average $324,044 in compensation due to caregiving.
After getting shut down late last year, a website that allows free access to paywalled academic papers has sprung back up in a shadowy corner of the Internet.
There’s a battle raging over whether academic research should be free, and it’s overflowing into the dark web.
Most modern scholarly work remains locked behind paywalls, and unless your computer is on the network of a university with an expensive subscription, you have to pay a fee, often around 30 dollars, to access each paper.
Many scholars say this system makes publishers rich—Elsevier, a company that controls access to more than 2,000 journals, has a market capitalization about equal to that of Delta Airlines—but does not benefit the academics that conducted the research, or the public at large. Others worry that free academic journals would have a hard time upholding the rigorous standards and peer reviews that the most prestigious paid journals are famous for.
One professor is borrowing a method from Harvard Business School to engage students and inspire better decision-making skills.
In a spacious classroom in Aldrich Hall on the Harvard Business School campus, 100 students are passionately discussing a case called “Battle Over a Bank.” But these aren’t MBA students deliberating over how much the government should regulate the financial sector. This group of mostly undergraduates, guided by the award-winning Harvard Business School professor David Moss, is diving into the fierce 1791 debate over whether the Constitution could be interpreted to allow the fledgling U.S. government the power to form a bank at all.
This class, “History of American Democracy,” is no pedestrian historical survey course. It uses the case method—the business school’s signature teaching technique—to immerse undergraduates (as well as a limited number of HBS students) in critical episodes in the development of American democracy.
Tracking them down is a globe-trotting adventure that rivals any jungle expedition.
In the darkness of the Akeley Hall of Mammals, swarms of kids gawk at beautifully staged dioramas of Africa’s wildlife. The stuffed safari, nestled in the American Museum of Natural History (AMNH) in New York, includes taxidermied leopards stalking a bush pig, preserved ostriches strutting in front of warthogs, and long-dead baboons cautiously considering a viper. In one corner, in a display marked “Upper Nile Region,” a lone hippo grazes next to a herd of lechwe, roan antelope, and a comically stern shoebill stork.
“This is my favorite one,” says Evon Hekkala, pointing to the display. “There’s a taxidermied crocodile tucked away down there.”
It takes a while to spot it and I have to crane my head to do so, but yes, there it is—a large crocodile, in the back, mouth agape, next to the hippo. It’s mostly hidden from view, and until recently, it was hidden from science, too.
For decades the Man of Steel has failed to find his groove, thanks to a continual misunderstanding of his strengths.
Superman should be invincible. Since his car-smashing debut in 1938, he’s starred in at least one regular monthly comic, three blockbuster films, and four television shows. His crest is recognized across the globe, his supporting cast is legendary, and anybody even vaguely familiar with comics can recount the broad strokes of his origin. (The writer Grant Morrison accomplished it in eight words: “Doomed Planet. Desperate Scientists. Last Hope. Kindly Couple.”) He’s the first of the superheroes, a genre that’s grown into a modern mass-media juggernaut.
And yet, for a character who gains his power from the light of the sun, Superman is curiously eclipsed by other heroes. According to numbers provided by Diamond Distributors, the long-running Superman comic sold only 55,000 copies a month in 2015, down from around 70,000 in 2010—a mediocre showing even for the famously anemic comic-book market. That’s significantly less than his colleague Batman, who last year moved issues at a comparatively brisk 150,000 a month. Mass media hasn’t been much kinder: The longest-running Superman television show, 2001’s Smallville, kept him out of his iconic suit for a decade. Superman Returns recouped its budget at the box office, but proved mostly forgettable.2013’s Man of Steel drew sharp criticism from critics and audiences alike for its bleak tone and rampaging finale. Trailers for the sequel, Batman v Superman: Dawn of Justice, have shifted the focus (and top billing) to the Dark Knight. Worst of all, conventional wisdom puts the blame on Superman himself. He’s boring, people say; he’s unrelatable, nothing like the Marvel characters dominating the sales charts and the box office. More than anything, he seems embarrassing. Look at him. Truth? Justice? He wears his underwear on the outside.