Long-term debt isn't a short-term crisis, no matter what Beltway insiders say
Joe Scarborough, a man comically ill at ease with numbers, Powerpoint, or any analysis that doesn't involve polling Beltway insiders, thinks Paul Krugman is crazy for worrying more about unemployment than the long-term debt right now.
In other words, Scarborough can't believe Krugman says we can wait until Medicare spending is a problem before doing more about it. Of course, the arithmophobic Scarborough can't explain why Krugman is wrong -- aside from saying everybody he talks to thinks so too -- which is why Scarborough outsourced the job to the senior economist at the RAND corporation. But, unfortunately for Scarborough, he seems to have found an economist who doesn't know much about the subject -- at least judging from the freshman-level errors throughout. Here are the lowlights from this piece, ostensibly arguing that long-term debt is our gravest short-term economic problem. (Note: Excerpts are italicized).
1) From the beginning of 2002, when U.S. government debt was at its most recent minimum as a share of GDP, to the end of 2012, the dollar lost 25 percent of its value, in price-adjusted terms, against a basket of the currencies of major trading partners. This may have been because investors fear that the only way out of the current debt problems will be future inflation.
It wasn't. Inflation was low, and investors didn't expect that to change, over the last decade. Core PCE inflation averaged 1.9 percent over this period, while 10-year breakevens, which tell us market expectations of future inflation (going back to 2003), averaged 2.18 percent. Now, the financial crisis depressed both inflation and inflation expectations, but, as you can see in the chart below, the latter mostly leveled off around a healthy 2.5 percent for most of the last 10 years. If markets feared future inflation in the face of mounting debt, they sure had a funny way of showing it.
This persistently low inflation, and expectations thereof, meant the Fed could, and did, keep interest rates low -- and lower rates tend to cause a lower dollar. In other words, this wasn't a story about debt. Indeed, as you can see in the chart below, the big decline in the dollar happened between 2002 and 2007, when debt levels were relatively low, while the dollar is actually higher today than it was in 2008, despite the big debt run-up.
2) More troubling for the future is that private domestic investment--the fuel for future economic growth--shows a strong negative correlation with government debt levels over several business cycles dating back to the late 1950s. Continuing high debt does not bode well in this regard.
This is a correlation masquerading as a legitimate point. Recessions happen when private investment falls, and recessions increase deficits and debt due to lower revenues and higher safety net spending. In other words, deficits and debt rise because investment has fallen, not vice versa. Now, it's true that too-big deficits can crowd out private investment during a boom -- that's the legitimate point -- but we know that's not a problem now since interest rates are still so low.
3) But the economics profession is beginning to understand that high levels of public debt can slow economic growth, especially when gross general government debt rises above 85 or 90 percent of GDP.
As Mike Konczal of the Roosevelt Institute points out, the idea that growth slows down when debt hits 90 percent of GDP has not been proven. It's just a correlation. And, again, it probably gets the causation backwards -- low growth causes high deficits and debt, not vice versa.
4) The U.S. share of global economic output has been falling since 1999--by nearly 5 percentage points as of 2011. As America's GDP share declined, so did its share of world trade, which may reduce U.S. influence in setting the rules for international trade.
It's not clear what cutting Medicare would do about China's rapid rise. Poorer countries tend to grow faster than richer ones -- that is, they converge -- and that won't change regardless of whether we raise the eligibility age for Medicare or not. And besides, a richer China (and India, and Brazil, and ...) is good for us, if not our power, since it means more markets for our goods. It's odd that the same people who argue against progressive taxation because growth isn't zero-sum take a decidedly different view when it comes to international growth.
This entire debate is a bit surreal. Nobody disputes that healthcare spending, including Medicare, is on an unsustainable trajectory. It's a matter of what to do to "bend the curve" and when to do it. Scarborough wants to increase the eligibility age, and he doesn't think it can wait, because ... well, it's not clear why. He's not saying anything bond investors don't already know, and yet the inflation-adjusted yield on the 30-year bond is only 0.61 percent. If Scarborough is right and bond investors are wrong, then there's a tremendous money-making opportunity in shorting long-term bonds. I wonder if he has the courage of this particular conviction.
But there's another reason, quiescent bond vigilantes aside, for waiting to deal with our long-term debt. We need more time to figure out how to do it. If we knew how to slow healthcare inflation, we would have slowed healthcare inflation. But we don't. Now, Obamacare introduced payment reforms and death panels IPAB to try to restrain spending, but we don't know if or how much they'll work, though there are some hopeful signs. The CBO just reported that healthcare spending has slowed so much the past few years that it's revised down projected federal healthcare spending by $200 billion over the rest of the decade -- or $50 billion more than raising the eligibility age from 65 to 67 would save. In other words, the things we know how to do won't save that much, and the things we don't know how to do might save much more. That's why we should play for more time.
Our elites are good at manufacturing crises, if nothing else, but Scarborough can't manufacture a debt crisis today. Markets won't cooperate -- and with good reason. They're more concerned about growth than debt, because they've done the math and realize the former is the only solution to the latter.
Don't tell anyone, but Powerpoint might have been involved.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
Live in anticipation, gathering stories and memories. New research builds on the vogue mantra of behavioral economics.
Forty-seven percent of the time, the average mind is wandering. It wanders about a third of the time while a person is reading, talking with other people, or taking care of children. It wanders 10 percent of the time, even, during sex. And that wandering, according to psychologist Matthew Killingsworth, is not good for well-being. A mind belongs in one place. During his training at Harvard, Killingsworth compiled those numbers and built a scientific case for every cliché about living in the moment. In a 2010 Science paper co-authored with psychology professor Daniel Gilbert, the two wrote that "a wandering mind is an unhappy mind."
For Killingsworth, happiness is in the content of moment-to-moment experiences. Nothing material is intrinsically valuable, except in whatever promise of happiness it carries. Satisfaction in owning a thing does not have to come during the moment it's acquired, of course. It can come as anticipation or nostalgic longing. Overall, though, the achievement of the human brain to contemplate events past and future at great, tedious length has, these psychologists believe, come at the expense of happiness. Minds tend to wander to dark, not whimsical, places. Unless that mind has something exciting to anticipate or sweet to remember.
As the public’s fear and loathing surge, the frontrunner’s durable candidacy has taken a dark turn.
MYRTLE BEACH, South Carolina—All politicians, if they are any good at their craft, know the truth about human nature.
Donald Trump is very good, and he knows it better than most.
Trump stands alone on a long platform, surrounded by a rapturous throng. Below and behind him—sitting on bleachers and standing on the floor—they fill this city’s cavernous, yellow-beige convention center by the thousands. As Trump will shortly point out, there are a lot of other Republican presidential candidates, but none of them get crowds anything like this.
Trump raises an orange-pink hand like a waiter holding a tray. “They are not coming in from Syria,” he says. “We’re sending them back!” The crowd surges, whistles, cheers. “So many bad things are happening—they have sections of Paris where the police are afraid to go,” he continues. “Look at Belgium, the whole place is closed down! We can’t let it happen here, folks.”
Places like St. Louis and New York City were once similarly prosperous. Then, 30 years ago, the United States turned its back on the policies that had been encouraging parity.
Despite all the attention focused these days on the fortunes of the “1 percent,” debates over inequality still tend to ignore one of its most politically destabilizing and economically destructive forms. This is the growing, and historically unprecedented, economic divide that has emerged in recent decades among the different regions of the United States.
Until the early 1980s, a long-running feature of American history was the gradual convergence of income across regions. The trend goes back to at least the 1840s, but grew particularly strong during the middle decades of the 20th century. This was, in part, a result of the South catching up with the North in its economic development. As late as 1940, per-capita income in Mississippi, for example, was still less than one-quarter that of Connecticut. Over the next 40 years, Mississippians saw their incomes rise much faster than did residents of Connecticut, until by 1980 the gap in income had shrunk to 58 percent.
Why are so many kids with bright prospects killing themselves in Palo Alto?
The air shrieks, and life stops. First, from far away, comes a high whine like angry insects swarming, and then a trampling, like a herd moving through. The kids on their bikes who pass by the Caltrain crossing are eager to get home from school, but they know the drill. Brake. Wait for the train to pass. Five cars, double-decker, tearing past at 50 miles an hour. Too fast to see the faces of the Silicon Valley commuters on board, only a long silver thing with black teeth. A Caltrain coming into a station slows, invites you in. But a Caltrain at a crossing registers more like an ambulance, warning you fiercely out of its way.
The kids wait until the passing train forces a gust you can feel on your skin. The alarms ring and the red lights flash for a few seconds more, just in case. Then the gate lifts up, signaling that it’s safe to cross. All at once life revives: a rush of bikes, skateboards, helmets, backpacks, basketball shorts, boisterous conversation. “Ew, how old is that gum?” “The quiz is next week, dipshit.” On the road, a minivan makes a left a little too fast—nothing ominous, just a mom late for pickup. The air is again still, like it usually is in spring in Palo Alto. A woodpecker does its work nearby. A bee goes in search of jasmine, stinging no one.
American education is largely limited to lessons about the West.
When I turned 15, my parents sent me alone on a one-month trip to Ecuador, the country where my father was born. This was tradition in our family—for my parents to send their first-generation American kids to the country of their heritage, where we would meet our extended family, immerse ourselves in a different culture, and learn some lessons on gratefulness.
My family’s plan worked. That month in Ecuador did more for my character, education, and sense of identity than any other experience in my early life. And five years later, my experience in Ecuador inspired me to spend more time abroad, studying in South Africa at the University of Cape Town. These two trips not only made me a lifelong traveler, but also a person who believes traveling to developing countries should be a necessary rite of passage for every young American who has the means.
Bill Gates has committed his fortune to moving the world beyond fossil fuels and mitigating climate change.
In his offices overlooking Lake Washington, just east of Seattle, Bill Gates grabbed a legal pad recently and began covering it in his left-handed scrawl. He scribbled arrows by each margin of the pad, both pointing inward. The arrow near the left margin, he said, represented how governments worldwide could stimulate ingenuity to combat climate change by dramatically increasing spending on research and development. “The push is the R&D,” he said, before indicating the arrow on the right. “The pull is the carbon tax.” Between the arrows he sketched boxes to represent areas, such as deployment of new technology, where, he argued, private investors should foot the bill. He has pledged to commit $2 billion himself.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
It was widely seen as a counter-argument to claims that poor people are "to blame" for bad decisions and a rebuke to policies that withhold money from the poorest families unless they behave in a certain way. After all, if being poor leads to bad decision-making (as opposed to the other way around), then giving cash should alleviate the cognitive burdens of poverty, all on its own.
Sometimes, science doesn't stick without a proper anecdote, and "Why I Make Terrible Decisions," a comment published on Gawker's Kinja platform by a person in poverty, is a devastating illustration of the Science study. I've bolded what I found the most moving, insightful portions, but it's a moving and insightful testimony all the way through.
It can cost retailers billions to cover shipping fees, but they're hoping it'll make their customers feel good and buy more.
Last year, my boyfriend wanted go to Best Buy on Black Friday to get a Blu-ray player for our apartment. I told him he was crazy, but let him go because a) I did really want a Blu-ray player for our apartment and b) some people need to learn the hard way. This Black Friday, we stayed home and watched Highlander, biding our time until Cyber Monday. After all, why leave home when there's free shipping?
Shopping online can be such a crapshoot, to the point where—now that I'm a seasoned online shopper with 10 years of experience—I rarely buy from online stores that charge shipping for purchase or returns. After too many pairs of shoes that didn't fit, and products that looked nothing like what was advertised—it's mentally hard to pay for shipping when there's a high chance you'll return it.