Recoveries have been getting weaker and weaker because that's how the Fed wants them
It's time to talk about everybody's least favorite Davos buzzword -- New Normal.
With GDP unexpectedly contracting 0.1 percent in the fourth quarter of 2012 (though the private sector mostly kept up, despite the obstacles we've thrown in its way), it's enough to make you wonder if this time really is different. In other words, has the economy settled into a, well, new normal of slower growth?
If it has, it's not quite new, at least when it comes to recoveries. As you can see in this Minneapolis Fed chart of job gains following recessions, something changed after 1981. Recoveries went from being V-shaped affairs characterized by rapid bouncebacks in employment to U-shaped ones better described as nasty, brutish, and long.
(Note: I excluded the recovery from the 1980 recession, because the double-dip in 1981 cut it short).
The story of the jobless recovery is one of what the Fed isn't doing. As Paul Krugman points out, recessions have become post-(or perhaps pre-) modern. Through the 1980s, postwar recessions happened when the Fed decided to raise rates to head off inflation, and recoveries happened when the Fed decided things had tamed down enough to lower rates. But now recessions happen when bubbles burst, with financial deregulation and the global savings glut making these more of a recurring feature of our economy, and the Fed hasn't been able to cut interest rates enough to generate strong post-crash recoveries. Or maybe it hasn't wanted to.
Here's a stupid question. Why have interest rates and inflation mostly been falling for the past 30 years? In other words if the Fed has been de facto, and later de jure, targeting inflation for most of this period (and it has), why has inflation been on a down trend (and it has)? As you can see in the chart below, core PCE inflation, which excludes food and energy costs, fell substantially from the Reagan recovery through the bursting tech bubble, and has more or less held steady since, though a bit more on the less side recently.
Say hello to "opportunistic disinflation." Okay, let's translate this from Fed-ese. Remember, the Fed is supposed to target 2 percent inflation, meaning it raises rates when prices rise by more than that much and lowers them once the economy's cooled off enough, but it wasn't always so. Back in the mid-1980s, inflation was hovering around 4 percent, a major achievement following the stagflation of the previous decade, but the Fed wanted it to go lower -- here's the crucial bit -- without taking the blame for it. The Volcker Fed had come in for quite a bit of abuse when it whipped inflation at the expense of the severe 1981-82 downturn, and the Fed seems to have learned it was better not to leave its fingerprints on the business cycle.
In other words, Let recessions do their dirty work for them.
It's not hard for central bankers to get what they want without doing anything, as long as what they want is less inflation (and that's almost always what central bankers want). They just have to wait for a recession to come along ... and then keep waiting until inflation falls to where they want it. Then, once prices have declined enough for their taste, they cut rates (or buy bonds) to stabilize inflation at this new, lower level. But it's one thing to stabilize inflation at a lower level; it's another to keep it there. The Fed has to raise rates faster than it otherwise would during the subsequent recovery to keep inflation from going back to where it was before the recession. It's what the Fed calls "opportunistic disinflation," and it's hard to believe this wasn't their strategy looking at falling inflation the previous few decades. Not that we have to guess. Fed president Edward Boehene actually laid out this approach in 1989, and Fed governor Laurence Meyer endorsed the idea of "reducing inflation cycle-to-cycle" in a 1996 speech -- the same year the Wall Street Journal leaked an internal Fed memo outlining the policy.
In short: Recoveries have been jobless, because that's how the Fed likes them.
But it gets worse. Pushing inflation progressively lower means recoveries get progressively weaker, since the Fed has to choke off inflation, and hence the recovery, at lower and lower levels. Now, to be fair, the Fed, and Ben Bernanke in particular, have awoken to the dangers of this approach. The danger, of course, is that the Fed gets in a situation where short-term rates are stuck at zero, but the economy stays stuck in a slump. Sound familiar? Bernanke realized this was a threat in 2002 when the economy was flirting with deflation despite 1.34 interest rates, and vowed not to let it happen here. (Remember, "disinflation" means falling inflation, and "deflation" means negative inflation).
The Fed, of course, did let it happen here. But it didn't let prices actually start to fall, which would make debt and borrowing more expensive at the worst possible moment, due to the Fed's bond-buying and to wages that are sticky downwards. Bernanke got the Fed to accept that opportunistic disinflation had gone too far with QE1 and QE2, but it's not clear that he's gotten them to give up on the idea altogether. Core inflation has settled in below 2 percent, and the Fed's economic projections don't show it rising above that level anytime soon. That's pushed nominal GDP growth -- the growth of the total size of the economy -- down to 4 percent for each of the past three years; a low level the Fed is apparently comfortable with. Bernanke seems to be trying to shift the consensus towards undoing some of this disinflation -- unlike previous rounds of bond-buying, QE3 was aimed at lowering unemployment, and not stopping lower prices, while the Evans rule explicitly says the Fed will tolerate inflation up to 2.5 percent -- but there's been no shift in the data so far. The Fed needs to realize there is no try when it comes to reflation. It has to promise to do whatever it takes.
The new normal doesn't have to be new or normal if the Fed doesn't want it to be.
Ben Stiller’s follow-up to his own comedy classic is a downright bummer, no matter how many celebrity cameos it tries to cram in.
You don’t need to go to the theater to get the full experience of Zoolander 2. Simply get your hands on a copy of the original, watch it, and then yell a bunch of unfunny topical lines every time somebody tells a joke. That’s how it feels to watch Ben Stiller’s sequel to his 2001 spoof of the fashion industry: Zoolander 2 takes pains to reference every successful gag you remember from the original, and then embellish them in painful—often offensive, almost always outdated—fashion. It’s a film that has no real reason to exist, and it spends its entire running time reaffirming that fact.
The original Zoolander, to be fair, had no business being as funny as it was—it made fun of an industry that already seems to exist in a constant state of self-parody, and much of its humor relied on simple malapropisms and sight gags. But it was hilarious anyway as a candid snapshot of the fizzling-out of ’90s culture. Like almost any zeitgeist comedy, it belonged to a particular moment—and boy, should it have stayed there. With Zoolander 2, Stiller (who directed, co-wrote, and stars) tries to recapture the magic of 2001 by referencing its past glories with increasing desperation, perhaps to avoid the fact that he has nothing new to say about the fashion industry or celebrity culture 15 years laters.
Today’s empires are born on the web, and exert tremendous power in the material world.
Mark Zuckerberg hasn’t had the best week.
First, Facebook’s Free Basics platform was effectively banned in India. Then, a high-profile member of Facebook’s board of directors, the venture capitalist Marc Andreessen, sounded off about the decision to his nearly half-a-million Twitter followers with a stunning comment.
“Anti-colonialism has been economically catastrophic for the Indian people for decades,” Andreessen wrote. “Why stop now?”
After that, the Internet went nuts.
Andreessen deleted his tweet, apologized, and underscored that he is “100 percent opposed to colonialism” and “100 percent in favor of independence and freedom.” Zuckerberg, Facebook’s CEO, followed up with his own Facebook post to say Andreessen’s comment was “deeply upsetting” to him, and not representative of the way he thinks “at all.”
Einstein’s gravitational waves rest on a genuinely radical idea.
After decades of anticipation, we have directly detected gravitational waves—ripples in spacetime traveling at the speed of light through the universe. Scientists at LIGO (the Laser Interferometic Gravitational-wave Observatory) have announced that they have measured waves coming from the inspiral of two massive black holes, providing a spectacular confirmation of Albert Einstein’s general theory of relativity, whose hundredth anniversary was celebrated just last year.
Finding gravitational waves indicates that Einstein was (once again) right, and opens a new window onto energetic events occurring around the universe. But there’s a deeper lesson, as well: a reminder of the central importance of locality, an idea that underlies much of modern physics.
The bureau successfully played the long game in both cases.
The story of law enforcement in the Oregon standoff is one of patience.
On the most obvious level, that was reflected in the 41 days that armed militia members occupied the Malheur National Wildlife Refuge near Burns. It took 25 days before the FBI and state police moved to arrest several leaders of the occupation and to barricade the refuge. It took another 15 days before the last of the final occupiers walked out, Thursday morning Oregon time.
Each of those cases involved patience as well: Officers massed on Highway 395 didn’t shoot LaVoy Finicum when he tried to ram past a barricade, nearly striking an FBI agent, though when he reached for a gun in his pocket they finally fired. Meanwhile, despite increasingly hysterical behavior from David Fry, the final occupier, officers waited him out until he emerged peacefully.
The revolution that ended the reign of beards occurred on September 30, 331 b.c., as Alexander the Great prepared for a decisive showdown with the Persian emperor for control of Asia. On that day, he ordered his men to shave. Yet from time immemorial in Greek culture, a smooth chin on a grown man had been taken as a sign of effeminacy or degeneracy. What can explain this unprecedented command? When the commander Parmenio asked the reason, according to the ancient historian Plutarch, Alexander replied, “Don’t you know that in battles there is nothing handier to grasp than a beard?” But there is ample cause to doubt Plutarch’s explanation. Stories of beard-pulling in battles were myth rather than history. Plutarch and later historians misunderstood the order because they neglected the most relevant fact, namely that Alexander had dared to do what no self-respecting Greek leader had ever done before: shave his face, likening himself to the demigod Heracles, rendered in painting and sculpture in the immortal splendor of youthful, beardless nudity. Alexander wished above all, as he told his generals before the battle, that each man would see himself as a crucial part of the mission. They would certainly see this more clearly if each of them looked more like their heroic commander.
When four American women were murdered during El Salvador’s dirty war, a young U.S. official and his unlikely partner risked their lives to solve the case.
On December 1, 1980, two American Catholic churchwomen—an Ursuline nun and a lay missionary—sat down to dinner with Robert White, the U.S. ambassador to El Salvador. They worked in rural areas ministering to El Salvador’s desperately impoverished peasants, and White admired their commitment and courage. The talk turned to the government’s brutal tactics for fighting the country’s left-wing guerrillas, in a dirty war waged by death squads that dumped bodies in the streets and an army that massacred civilians. The women were alarmed by the incoming Reagan administration’s plans for a closer relationship with the military-led government. Because of a curfew, the women spent the night at the ambassador’s residence. The next day, after breakfast with the ambassador’s wife, they drove to San Salvador’s international airport to pick up two colleagues who were flying back from a conference in Nicaragua. Within hours, all four women would be dead.
Jim Gilmore joins Chris Christie and Carly Fiorina, and leaves the race after a poor showing in New Hampshire.
Jim Gilmore’s candidacy this year was improbable—but even more improbable was the minor cult of personality that developed around it.
The former Virginia governor never had a chance. Not, like, in the sense of Lindsey Graham, a candidate with national standing but no path to the presidency. More in the George Pataki sense: a guy who had no real business in race, but was running anyway. Except that Gilmore made Pataki look like a juggernaut. Also, Pataki saw the writing on the wall and had the sense to drop out in late December. Gilmore soldiered on, and ended up as the last of the truly longshots to leave.
The result was that Gilmore turned into a sort of folk hero. Not for voters, mind you—he managed only 12 votes in Iowa and 125 in New Hampshire, and his campaign was funded largely by loans from himself. Because of his low support in the polls, Gilmore only made the cut for the very first kid’s-table debate in August, and then again for the undercard in late January. Other than that, he was shut out completely.
A robotic road safety worker in India, a sacrificial llama in Bolivia, a sea otter receives a valentine, a deadly earthquake in Taiwan, a leopard attack in India, and much more.
A murmuration of starlings over Israel, a robotic road safety worker in India, a sacrificial llama in Bolivia, border barriers between Tunisia and Libya, a sea otter receives a valentine, a deadly earthquake in Taiwan, the annual Shrovetide football match in England, a leopard attack in India, and much more.
Though the senator may be running as a moderate, his proposal is anything but.
Senator Marco Rubio is running as the acceptable moderate among the three leading Republicans presidential candidates, compared to Senator Ted Cruz and Donald Trump. But as the nonpartisan Tax Policy Center reported yesterday, his tax plan is not moderate, and it is scarcely acceptable.
Rubio’s proposals would deliver a $1 million tax break to the richest 0.1 percent of the country in its first year and slash government revenue by $6.8 trillion over the next decade. To avoid adding to the deficit, it would require “unprecedented” spending cuts, according to TPC. But that’s not all. Rubio has also called for higher military spending, delayed cuts to Medicare and Social Security, and a Balanced Budget Amendment. To appreciate the impossibility of balancing the budget while raising military spending and slashing taxes at unprecedented levels, try running a marathon while fasting.
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.