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.
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.
A new anatomical understanding of how movement controls the body’s stress response system
Elite tennis players have an uncanny ability to clear their heads after making errors. They constantly move on and start fresh for the next point. They can’t afford to dwell on mistakes.
Peter Strick is not a professional tennis player. He’s a distinguished professor and chair of the department of neurobiology at the University of Pittsburgh Brain Institute. He’s the sort of person to dwell on mistakes, however small.
“My kids would tell me, dad, you ought to take up pilates. Do some yoga,” he said. “But I’d say, as far as I’m concerned, there's no scientific evidence that this is going to help me.”
Still, the meticulous skeptic espoused more of a tennis approach to dealing with stressful situations: Just teach yourself to move on. Of course there is evidence that ties practicing yoga to good health, but not the sort that convinced Strick. Studies show correlations between the two, but he needed a physiological mechanism to explain the relationship. Vague conjecture that yoga “decreases stress” wasn’t sufficient. How? Simply by distracting the mind?
How men and women digest differently, diet changes our skin, and gluten remains mysterious: A forward-thinking gastroenterologist on eating one's way to "gutbliss"
Robynne Chutkan, MD, is an integrative gastroenterologist and founder of the Digestive Center for Women, just outside of Washington, D.C. She trained at Columbia University and is on faculty at Georgetown, but her approach to practicing medicine and understanding disease is more holistic than many specialists with academic backgrounds. She has also appeared on The Dr. Oz Show (of which I’ve been openly skeptical in the past, because of Oz’s tendency to divorce his recommendations from evidence).
An increasing number of respondents are checking “Some Other Race” on U.S. Census forms, forcing officials to rethink current racial categories.
Something unusual has been taking place with the United States Census: A minor category that has existed for more than 100 years is elbowing its way forward. “Some Other Race,” a category that first entered the form as simply “Other” in 1910, was the third-largest category after “White” and “Black” in 2010, alarming officials, who are concerned that if nothing is done ahead of the 2020 census, this non-categorizable category of people could become the second-largest racial group in the United States.
Among those officials is Roberto Ramirez, the assistant division chief of the Census Bureau’s special population statistics branch. Ramirez is familiar with the complexities of filling out the census form: He checks “White” and “Some Other Race” to reflect his Hispanic ethnicity. Ramirez joins a growing share of respondents who are selecting “Some Other Race.” “People are increasingly not answering the race question. They are not identifying with the current categories, so we are trying to come up with a (better) question,” Ramirez told me. Ramirez and his colleague, Nicholas Jones, the director of race and ethnic research and outreach at the Census Bureau, have been working on fine-tuning the form to extract detailed race and ethnic reporting, and subsequently drive down the number of people selecting “Some Other Race.”
The political commentator may be more committed to the Republican nominee’s platform than he is.
Donald Trump has just betrayed Ann Coulter. Which is a dangerous thing to do.
This week, Coulter released her new book, In Trump We Trust. As the title suggests, it’s a defense of Trump. But more than that, it’s a defense of Trumpism. Most Trump surrogates contort themselves to defend whatever The Donald says, no matter its ideological content. They’re like communist party functionaries. They get word from the ideologists on high, and regurgitate it as best they can.
Coulter is different. She’s an ideologist herself. She realized the potency of the immigration issue among conservatives before Trump did. On June 1 of last year, she released Adios America, which devotes six chapters to the subject of immigrants and rape. Two weeks later, Trump—having received an advanced copy—famously picked up the thread in his announcement speech.
When news broke about the horrific mass shooting in Orlando ten weeks ago, Donald Trump’s first reaction, as noted in Time Capsule #19, was to send out a Tweet saying “Appreciate the congrats for being right on radical Islamic terrorism.”
When news broke today about the horrific fatal shooting of yet another person in Chicago, 32-year old Nykea Aldridge, mother of four and cousin of basketball star Dwyane Wade, Donald Trump’s first reaction was via the Tweet shown above.
This time he didn’t say “appreciate the congrats” on being right in his argument that life for African-Americans is so terrible that “what the hell do you have to lose?” by voting Trump. But his reaction was just as it had been with Orlando: bad news for someone else was significant mainly in being good news for him.
If Hillary Clinton beats Donald Trump, her party will have set a record in American politics.
If Donald Trump can’t erase Hillary Clinton’s lead in the presidential race, the Republican Party will cross an ominous milestone—and confront some agonizing choices. Democrats have won the popular vote in five of the six presidential elections since 1992. (In 2000, Al Gore won the popular vote but lost the Electoral College and the White House to George W. Bush.) If Clinton maintains her consistent advantage in national and swing-state polls through Election Day, that means Democrats will have won the popular vote in six of the past seven presidential campaigns.
Since the 1828 election of Andrew Jackson that historians consider the birth of the modern two-party system, no party has ever won the presidential popular vote six times over seven elections. Even the nation’s most successful political figures have fallen short of that standard.
Donald Trump’s new campaign CEO, who is registered to vote at an empty house in Florida, may be as scandal-plagued as his predecessors.
Barely a week into the job, Donald Trump’s new campaign CEO is already facing harsh scrutiny over a 20-year-old domestic-violence charge and an allegation of voter-registration fraud.
On Thursday night, the New York Postand other outlets reported that Stephen Bannon was charged with misdemeanor domestic violence, battery, and dissuading a witness in 1996, after an altercation with his then-wife in Santa Monica, California. According to a police report, Bannon’s spouse said he pulled at her neck and wrist. A spokesman told Politico that Bannon was never questioned by police and pleaded not guilty. The charges were dropped around the time that the couple divorced later that year. In divorce proceedings, she outlined several vulgarities Bannon allegedly used.
The candidate’s campaign bought $55,000 worth of his newest book, Crippled America. But did they follow the law?
Sales of Donald Trump’s latest book, Crippled America, were decent, if not great—they easily beat out every other Republican candidate except for Ben Carson, according to Nielsen. But the Trump campaign found one way to boost sales: buying the books themselves.
The Daily Beast spotted in FEC filings that Team Trump purchased more than $55,000 worth of the book. (It’s been re-released in paperback with the sunnier title, Great Again.) Now, candidates buying up their own books is nothing new, but there’s a legal issue here. Campaigns can buy books in bulk assuming they don’t pay royalties, because if they do, then the campaign has effectively paid the candidate—which is against the law.
“It’s fine for a candidate’s book to be purchased by his committee, but it’s impermissible to receive royalties from the publisher,” legal expert Paul S. Ryan told the Beast. “That amounts to an illegal conversion of campaign funds to personal use. There’s a well established precedent from the FEC that funds from the campaign account can’t end up in your own pocket.”
Higher education should be promoted to all students as an opportunity to experience an intellectual awakening, not just increase their earning power.
A 12th-grader wrote a college admissions essay about wanting to pursue a career in oceanography. Let’s call her Isabella. A few months ago, we edited it in my classroom during lunch. The writing was good, but plenty of 17-year-olds fantasize about swimming with whales. Her essay was distinctive for another reason: Her career goals were not the highlight of the essay. They were just a means of framing her statement of purpose, something surprisingly few personal statements actually get around to making.
The essay’s core concerned the rhetoric that educators had used to motivate her and her peers—other minority students from low-income communities. She’d been encouraged to think of college foremost as a path to socioeconomic mobility. Since elementary school, teachers had rhapsodized about the opportunities that four years of higher education could unlock. Administrators had rattled off statistics about the gulf in earnings between college graduates and those with only high-school diplomas. She’d been told to think about her family, their hopes for her, what they hadn’t had and what she could have if she remained diligent. She’d been promised that good grades and a ticket to a good college would lead to a good job, one that would guarantee her financial independence and enable her to give back to those hard-working people who had placed their faith in her.