There is no evidence that countries like the United States face debt tipping points
Have you read the opinion section of any newspaper in the last three years? Yes? Then there is a better-than-even chance you have come across some impressive-sounding analyst predict that the United States is "turning into Greece."
Maybe it's been a while, so we'll recap. The short version of this story is that we'll spend ourselves into bankruptcy. The longer version says that too much public debt makes markets nervous. Nervous markets demand higher interest rates. Higher rates mean higher deficits and lower growth, both of which mean more burdensome debt. More burdensome debt makes markets even more nervous. And around and around we go in a vicious circle into insolvency.
As far as scare stories go, this is pretty damn scary. It's also just a story. Rates haven't risen as debt has the last few years; they have fallen to historic lows. Of course, that hasn't stopped the Greek chorus from predicting that the economy is going to Hades. But when? Is it when debt reaches 100 percent of GDP? Or 90 percent, as Carmen Reinhart and Kenneth Rogoff famously argued?
What about 80 percent?
That was the bright white line drawn in a recent paper by David Greenlaw, James Hamilton, Peter Hooper and Frederic Mishkin. Greenlaw & Co. ran regressions on 20 advanced economies from 2000 to 2011 to see if there's a relationship between a country's borrowing costs one year and its gross debt, net debt, and 5-year current account average the previous one. (Glossary Interlude: Gross debt refers to the total amount of debt, including debt the government owes to itself. Net debt is the amount held by the public, minus any government assets. Current account is the balance of trade, which includes both net exports and net income on foreign investments).
They found a link. By their calculations, the coefficients for gross and net debt were "both highly statistically significant", and increasing both debt levels by 1 percentage point of GDP would increase borrowing costs by 4.5 basis points (or 0.045 percentage points). The coefficient for the current account balance was also highly significant, and decreasing the balance by 1 percentage point of GDP would increase borrowing costs by 18 basis points.
This is a big deal. It's not that this regression equation has much predictive power (the authors admit it doesn't) or that the above 4.5 basis points are all that scary; it's the claim that there's a statistically significant relationship between debt and rates. After all, if Greenlaw & Co. are right about debt tipping points, then we are, technically-speaking, screwed. Our gross debt to GDP is already at 102 percent -- enough to send our borrowing costs soaring, as they predict below.
If they are right.
They almost certainly are not.
WHY WE'RE SPECIAL
[Things are about to get very wonky below, so my editor forced me to sum up things here. The two main conclusions are: (1) For countries that can borrow in their own currency, like the U.S., higher debt doesn't clearly lead to higher interest rates. (2) For countries that don't control their currencies, like Greece, it's borrowing too much from foreigners (NOT borrowing too much in general) that clearly leads to much higher borrowing costs. Okay, forward with the wonkiness... ]
Not all debt is created equal. Countries that borrow in a currency they control play under a different set of rules. They can never run out of money to pay back what they owe, since they can always print what they need as a last resort. That's not to say they actually do or should turn to the printing-press to finance themselves. But the option to do so calms markets. After all, inflation is a lot less bad than default for creditors. That's why it's no so easy for countries that don't borrow in a currency they control. They can default. And this is a case where thinking can make things so. Indeed, as Paul De Grauwe points out, countries that don't have their own central bank, like euro members, can fall victim to self-fulfilling panics that push them into bankruptcy. In other words, markets force up interest rates because they fear default -- which then pushes them into default. It's a bank-run on a country.
So we have to answer one big question. How much of Greenlaw & Co.'s results are driven by euro countries that have completely different debt dynamics than non-euro countries?
Well, as Paul Krugman points out, 12 of the 20 countries they look at are either part of the euro, or, in Denmark's case, pegged to it. The remaining ones show no signs of anything resembling debt tipping points. Often the reverse. That's simple enough to see if we break up their sample. The chart below looks at the pre-crisis years from their sample, and shows the non-euro countries in red, the core-euro countries in green, and the (later) troubled PIIGS countries in blue. Back then, at least, there wasn't any difference between -- except for Japan, which had far more debt, and far lower borrowing costs. Nor was there much of any discernible relationship between debt and interest rates.
But then Lehman failed, and the world changed. Debt went up and borrowing costs came down -- except for the PIIGS.
I decided to go back and see what kind of results I'd get if I looked at the non-euro countries and PIIGS separately. I started by trying to recreate the Greenlaw & Co. result for the entire 20-country sample over the 12 years -- which I was able to do, with some very slight differences due to slightly different data sources. (I couldn't find IMF data on long-term interest rates for every country, so I used OECD data to fill in the blanks). Next, I ran a regression with country and time-fixed effects on the non-euro countries -- Australia, Canada, Japan, Norway, Sweden, Switzerland, the U.K., and the U.S. -- from 2000 to 2011. I got coefficients of .00743, .00575, and -0.0695 for gross debt, net debt, and current account, respectively. None of them were statistically significant at the 95 percent level. (The P>t values were 0.13, 0.18, and 0.087).
To translate from stats-speak: our equation for non-euro countries tells us increasing debt by 1 percentage point of GDP only increases borrowing costs by 1.3 basis points. And that result isn't even statistically significant. In other words, there is no evidence of a debt tipping point for countries that borrow in money they can print.
But what about Europe's troubled economies? The Greenlaw & Co. results should hold up there, if nowhere else, right? Well, kind of. I ran another regression with country and time fixed effects on the PIIGS -- Portugal, Italy, Ireland, Greece, and Spain -- from 2000 to 2011, and I got coefficients of 0.0605, 0.0209, and -.8952 for gross debt, net debt, and current account. The coefficients for gross debt and the current account were statistically significant (the latter highly so), but not for net debt, since the PIIGS mostly have the same amount of gross and net debt. (The P>t values were 0.046, 0.342, and 0). I went back and ran the regression again, this time without net debt, and got coefficients of 0.0843 and -0.9157 for gross debt and the current account. Both were highly significant. (The P>t values were 0 for both).
Translated: our equation for the PIIGS tells us increasing debt by 1 percentage point of GDP increases borrowing costs by 8.4 basis points -- but increasing the current account deficit by 1 percentage point of GDP increases borrowing costs by 91 basis points! The PIIGS do have a serious problem, but that problem is borrowing too much from foreigners, not too much government borrowing, in general. Of course, this isn't exactly new information. Paul Krugman, among others, has been pointing out for years that the euro crisis is really a balance of payments crisis that just looks like a debt crisis because of the common currency.
Beware economists bearing regressions -- and journalists too. My sample sizes here are so ridiculously small that the results are hardly dispositive. So don't pay attention to the evidence. Pay attention to the lack of evidence.
There isn't any evidence that the U.S., or other countries that borrow in currencies they control, face some debt tipping point after which borrowing costs spiral out of control. There isn't even much evidence this is true of Europe's troubled economies. Borrowing costs fell for the PIIGS in 2012 (one year after Greenlaw & Co.'s sample ended), not because those countries reduced their debt burdens, but because the ECB promised to do "whatever it takes" to save the euro. A monetary backstop matters more than the amount of debt. Reducing debt isn't as empirically urgent as we hear.
Our Greek chorus are more Chicken Littles than Cassandras.
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.
Defining common cultural literacy for an increasingly diverse nation.
Is the culture war over?
That seems an absurd question. This is an age when Confederate monuments still stand; when white-privilege denialism is surging on social media; when legislators and educators in Arizona and Texas propose banning ethnic studies in public schools and assign textbooks euphemizing the slave trade; when fear of Hispanic and Asian immigrants remains strong enough to prevent immigration reform in Congress; when the simple assertion that #BlackLivesMatter cannot be accepted by all but is instead contested petulantly by many non-blacks as divisive, even discriminatory.
And that’s looking only at race. Add gender, guns, gays, and God to the mix and the culture war seems to be raging along quite nicely.
As the world frets over Greece, a separate crisis looms in China.
This summer has not been calm for the global economy. In Europe, a Greek referendum this Sunday may determine whether the country will remain in the eurozone. In North America, meanwhile, the governor of Puerto Rico claimed last week that the island would be unable to pay off its debts, raising unsettling questions about the health of American municipal bonds.
But the season’s biggest economic crisis may be occurring in Asia, where shares in China’s two major stock exchanges have nosedived in the past three weeks. Since June 12, the Shanghai stock exchange has lost 24 percent of its value, while the damage in the southern city of Shenzhen has been even greater at 30 percent. The tumble has already wiped out more than $2.4 trillion in wealth—a figure roughly 10 times the size of Greece’s economy.
A new book by the evolutionary biologist Jerry Coyne tackles arguments that the two institutions are compatible.
In May 1988, a 13-year-old girl named Ashley King was admitted to Phoenix Children’s Hospital by court order. She had a tumor on her leg—an osteogenic sarcoma—that, writes Jerry Coyne in his book Faith Versus Fact, was “larger than a basketball,” and was causing her leg to decay while her body started to shut down. Ashley’s Christian Scientist parents, however, refused to allow doctors permission to amputate, and instead moved their daughter to a Christian Science sanatorium, where, in accordance with the tenets of their faith, “there was no medical care, not even pain medication.” Ashley’s mother and father arranged a collective pray-in to help her recover—to no avail. Three weeks later, she died.
In 1992, the neuroscientist Richard Davidson got a challenge from the Dalai Lama. By that point, he’d spent his career asking why people respond to, in his words, “life’s slings and arrows” in different ways. Why are some people more resilient than others in the face of tragedy? And is resilience something you can gain through practice?
The Dalai Lama had a different question for Davidson when he visited the Tibetan Buddhist spiritual leader at his residence in Dharamsala, India. “He said: ‘You’ve been using the tools of modern neuroscience to study depression, and anxiety, and fear. Why can’t you use those same tools to study kindness and compassion?’ … I did not have a very good answer. I said it was hard.”
Be kind, show understanding, do good—but, some scientists say, don’t try to feel others’ pain.
In 2006, then-senator Barack Obama gave a commencement speech offering what seemed like very sensible advice. “There’s a lot of talk in this country about the federal deficit,” he told Northwestern’s graduating class. “But I think we should talk more about our empathy deficit—the ability to put ourselves in someone else’s shoes; to see the world through those who are different from us—the child who’s hungry, the laid-off steelworker, the immigrant woman cleaning your dorm room.”
In the years since then, the country has followed Obama’s counsel, at least when it comes to talking about empathy. It’s become a buzzword, extolled by Arianna Huffington, taught to doctors and cops, and used as a test for politicians. "We are on the cusp of an epic shift,” according to Jeremy Rifkin’s 2010 book The Empathetic Civilization. “The Age of Reason is being eclipsed by the Age of Empathy."
For centuries, experts have predicted that machines would make workers obsolete. That moment may finally be arriving. Could that be a good thing?
1. Youngstown, U.S.A.
The end of work is still just a futuristic concept for most of the United States, but it is something like a moment in history for Youngstown, Ohio, one its residents can cite with precision: September 19, 1977.
For much of the 20th century, Youngstown’s steel mills delivered such great prosperity that the city was a model of the American dream, boasting a median income and a homeownership rate that were among the nation’s highest. But as manufacturing shifted abroad after World War II, Youngstown steel suffered, and on that gray September afternoon in 1977, Youngstown Sheet and Tube announced the shuttering of its Campbell Works mill. Within five years, the city lost 50,000 jobs and $1.3 billion in manufacturing wages. The effect was so severe that a term was coined to describe the fallout: regional depression.
The Fourth of July—a time we Americans set aside to celebrate our independence and mark the war we waged to achieve it, along with the battles that followed. There was the War of 1812, the War of 1833, the First Ohio-Virginia War, the Three States' War, the First Black Insurrection, the Great War, the Second Black Insurrection, the Atlantic War, the Florida Intervention.
Confused? These are actually conflicts invented for the novel The Disunited States of Americaby Harry Turtledove, a prolific (and sometimes-pseudonymous) author of alternate histories with a Ph.D. in Byzantine history. The book is set in the 2090s in an alternate United States that is far from united. In fact, the states, having failed to ratify a constitution following the American Revolution, are separate countries that oscillate between cooperating and warring with one another, as in Europe.
People labeled “smart” at a young age don’t deal well with being wrong. Life grows stagnant.
At whatever agesmart people develop the idea that they are smart, they also tend to develop vulnerability around relinquishing that label. So the difference between telling a kid “You did a great job” and “You are smart” isn’t subtle. That is, at least, according to one growing movement in education and parenting that advocates for retirement of “the S word.”
The idea is that when we praise kids for being smart, those kids think: Oh good, I'm smart. And then later, when those kids mess up, which they will, they think: Oh no, I'm not smart after all. People will think I’m not smart after all. And that’s the worst. That’s a risk to avoid, they learn.“Smart” kids stand to become especially averse to making mistakes, which are critical to learning and succeeding.
The retired general and former CIA director holds forth on the Middle East.
ASPEN, Colo.—Retired U.S. Army General David Petraeus pioneered America’s approach to counterinsurgency, led the surge in Iraq, served as director of the CIA for a year, and was sentenced to two years probation for leaking classified information to his mistress. On Wednesday at the Aspen Ideas Festival, he was interviewed by my colleague, Jeffrey Goldberg, about subjects including efforts to stop Iran’s nuclear program; the civil war in Syria; ISIS and the threat it poses to the United States; and the Iraq War.
Here are several noteworthy moments from their conversation, slightly condensed:
The Risks of Attacking Iran
Jeffrey Goldberg: So you believe that, under certain circumstances, President Obama would still use military force against Iran?
David Petraeus: I think he would, actually. I know we’ve had red lines that didn’t turn out to be red lines. ... I think this is a different issue, and I clearly recognize how the administration has sought to show that this is very, very different from other sort of off-the-cuff remarks.
Goldberg: How did the Obama administration stop Israel from attacking Iran? And do you think that if this deal does go south, that Israel would be back in the picture?
Petraeus: I don’t, actually. I think Israel is very cognizant of its limitations. ... The Israelis do not have anything that can crack this deeply buried enrichment site ... and if you cannot do that, you’re not going to set the program back very much. So is it truly worth it, then?
So that’s a huge limitation. It’s also publicly known that we have a 30,000-pound projectile that no one else has, that no one else can even carry. The Massive Ordinance Penetrator was under design for almost six years. ... If necessary, we can take out all these facilities and set them back a few years, depending on your assumptions.
But that’s another roll of the iron dice, as Bismarck used to say, and you never know when those dice are rolled what the outcome is going to be. You don’t know what risks could materialize for those who are in harm’s way.
You don’t know what the response could be by Iran.
There’s always the chance that there will be salvos at Israel, but what if they decide to go at the Gulf states, where we have facilities in every single one.
This is not something to be taken lightly, clearly.