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.
Biology textbooks tell us that lichens are alliances between two organisms—a fungus and an alga. They are wrong.
In 1995, if you had told Toby Spribille that he’d eventually overthrow a scientific idea that’s been the stuff of textbooks for 150 years, he would have laughed at you. Back then, his life seemed constrained to a very different path. He was raised in a Montana trailer park, and home-schooled by what he now describes as a “fundamentalist cult.” At a young age, he fell in love with science, but had no way of feeding that love. He longed to break away from his roots and get a proper education.
At 19, he got a job at a local forestry service. Within a few years, he had earned enough to leave home. His meager savings and non-existent grades meant that no American university would take him, so Spribille looked to Europe.
Why Millennials aren’t buying cars or houses, and what that means for the economy
In 2009, Ford brought its new supermini, the Fiesta, over from Europe in a brave attempt to attract the attention of young Americans. It passed out 100 of the cars to influential bloggers for a free six-month test-drive, with just one condition: document your experience online, whether you love the Fiesta or hate it.
Young bloggers loved the car. Young drivers? Not so much. After a brief burst of excitement, in which Ford sold more than 90,000 units over 18 months, Fiesta sales plummeted. As of April 2012, they were down 30 percent from 2011.
Don’t blame Ford. The company is trying to solve a puzzle that’s bewildering every automaker in America: How do you sell cars to Millennials (a k a Generation Y)? The fact is, today’s young people simply don’t drive like their predecessors did. In 2010, adults between the ages of 21 and 34 bought just 27 percent of all new vehicles sold in America, down from the peak of 38 percent in 1985. Miles driven are down, too. Even the proportion of teenagers with a license fell, by 28 percent, between 1998 and 2008.
It’s known as a modern-day hub of progressivism, but its past is one of exclusion.
PORTLAND, Ore.— Victor Pierce has worked on the assembly line of a Daimler Trucks North America plant here since 1994. But he says that in recent years he’s experienced things that seem straight out of another time. White co-workers have challenged him to fights, mounted “hangman’s nooses” around the factory, referred to him as “boy” on a daily basis, sabotaged his work station by hiding his tools, carved swastikas in the bathroom, and written the word “nigger” on walls in the factory, according to allegations filed in a complaint to the Multnomah County Circuit Court in February of 2015.
Pierce is one of six African Americans working in the Portland plant whom the lawyer Mark Morrell is representing in a series of lawsuits against Daimler Trucks North America. The cases have been combined and a trial is scheduled for January of 2017.
Delegates in Cleveland answer a nightmare question: Would they take four more years of Barack Obama over a Hillary Clinton presidency?
CLEVELAND—It was a question no Republican here wanted to contemplate.
The query alone elicited winces, scoffs, and more than a couple threats of suicide. “I would choose to shoot myself,” one delegate from Texas replied. “You want cancer or a heart attack?” cracked another from North Carolina.
Hillary Clinton and Barack Obama have each been objects of near histrionic derision from Republicans for years (decades in Clinton’s case), but never more so than during the four days of the GOP’s national convention. Republicans onstage at Quicken Loans Arena and in the dozens of accompanying events have accused President Obama of literally destroying the country in his eight years in the White House. Speakers and delegates subjected Clinton to even harsher rhetoric, charging her with complicity in death and mayhem and then repeatedly chanting, “Lock her up!” from the convention floor.
There’s a special “debut” category for vice-presidential selections who very suddenly find themselves in the world’s media glare.
VP picks who had mounted serious runs for president don’t quite fit this category. They already knew what it was like to handle big audiences and the press. For example: the elder George Bush became Ronald Reagan’s VP candidate in 1980, but only after running against Reagan in the primary campaign. The same was true of Joe Biden, who had run against Barack Obama (and Hillary Clinton) for the nomination in 2008 before becoming Obama’s running mate, and had run 20 years earlier too. In electoral politics, Dick Cheney had gotten only as far as Wyoming’s seat in Congress when George W. Bush picked him in 2000. But Cheney was already internationally known as Gerald Ford’s White House chief of staff and George H.W. Bush’s Secretary of Defense during the Gulf War.
A crop of books by disillusioned physicians reveals a corrosive doctor-patient relationship at the heart of our health-care crisis.
For someone in her 30s, I’ve spent a lot of time in doctors’ offices and hospitals, shivering on exam tables in my open-to-the-front gown, recording my medical history on multiple forms, having enough blood drawn in little glass tubes to satisfy a thirsty vampire. In my early 20s, I contracted a disease that doctors were unable to identify for years—in fact, for about a decade they thought nothing was wrong with me—but that nonetheless led to multiple complications, requiring a succession of surgeries, emergency-room visits, and ultimately (when tests finally showed something was wrong) trips to specialists for MRIs and lots more testing. During the time I was ill and undiagnosed, I was also in and out of the hospital with my mother, who was being treated for metastatic cancer and was admitted twice in her final weeks.
Narcissism, disagreeableness, grandiosity—a psychologist investigates how Trump’s extraordinary personality might shape his possible presidency.
In 2006, Donald Trump made plans to purchase the Menie Estate, near Aberdeen, Scotland, aiming to convert the dunes and grassland into a luxury golf resort. He and the estate’s owner, Tom Griffin, sat down to discuss the transaction at the Cock & Bull restaurant. Griffin recalls that Trump was a hard-nosed negotiator, reluctant to give in on even the tiniest details. But, as Michael D’Antonio writes in his recent biography of Trump, Never Enough, Griffin’s most vivid recollection of the evening pertains to the theatrics. It was as if the golden-haired guest sitting across the table were an actor playing a part on the London stage.
“It was Donald Trump playing Donald Trump,” Griffin observed. There was something unreal about it.
Don Johnson won nearly $6 million playing blackjack in one night, single-handedly decimating the monthly revenue of Atlantic City’s Tropicana casino. Not long before that, he’d taken the Borgata for $5 million and Caesars for $4 million. Here’s how he did it.
Don Johnson finds it hard to remember the exact cards. Who could? At the height of his 12-hour blitz of the Tropicana casino in Atlantic City, New Jersey, last April, he was playing a hand of blackjack nearly every minute.
Dozens of spectators pressed against the glass of the high-roller pit. Inside, playing at a green-felt table opposite a black-vested dealer, a burly middle-aged man in a red cap and black Oregon State hoodie was wagering $100,000 a hand. Word spreads when the betting is that big. Johnson was on an amazing streak. The towers of chips stacked in front of him formed a colorful miniature skyline. His winning run had been picked up by the casino’s watchful overhead cameras and drawn the close scrutiny of the pit bosses. In just one hand, he remembers, he won $800,000. In a three-hand sequence, he took $1.2 million.
Fulfilling what might be the Russian autocrat’s dearest wish, Trump has openly questioned whether the U.S. should keep its commitments to NATO.
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I am not suggesting that Donald Trump is employed by Putin—though his campaign manager, Paul Manafort, was for many years on the payroll of the Putin-backed former president of Ukraine, Viktor Yanukovych. I am arguing that Trump’s understanding of America’s role in the world aligns with Russia’s geostrategic interests; that his critique of American democracy is in accord with the Kremlin’s critique of American democracy; and that he shares numerous ideological and dispositional proclivities with Putin—for one thing, an obsession with the sort of “strength” often associated with dictators. Trump is making it clear that, as president, he would allow Russia to advance its hegemonic interests across Europe and the Middle East. His election would immediately trigger a wave of global instability—much worse than anything we are seeing today—because America’s allies understand that Trump would likely dismantle the post-World War II U.S.-created international order. Many of these countries, feeling abandoned, would likely pursue nuclear weapons programs on their own, leading to a nightmare of proliferation.
Only one nation averages more than 2 cups of coffee per day. It's the Netherlands.
America might be famous for running on coffee, but it doesn’t run on much. Not compared to a handful of other countries, anyway. When it comes to actual coffee consumption per person, the US doesn’t even crack the top 15.
For much of Europe, and especially Scandinavia, the story is quite different. In a review in 2010 about Stieg Larsson’s hit Swedish trilogy, the New York Times wrote incredulously about how the books’ scenes seemed to always revolve around endless servings of coffee:
"…everyone works fervidly into the night and swills tons of coffee; hardly a page goes by without someone “switching on the coffee machine,” ordering “coffee and a sandwich” or responding affirmatively to the offer 'Coffee?'"