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.
By announcing the first detection of gravitational waves, scientists have vindicated Einstein and given humans a new way to look at the universe.
More than a billion years ago, in a galaxy that sits more than a billion light-years away, two black holes spiraled together and collided. We can’t see this collision, but we know it happened because, as Albert Einstein predicted a century ago, gravitational waves rippled out from it and traveled across the universe to an ultra-sensitive detector here on Earth.
This discovery, announced today by researchers with the Laser Interferometer Gravitational-wave Observatory (LIGO), marks another triumph for Einstein’s general theory of relativity. And more importantly, it marks the beginning of a new era in the study of the universe: the advent of gravitational-wave astronomy. The universe has just become a much more interesting place.
The city has filed a suit demanding $500 in payment for emergency treatment for the boy after a police officer fatally shot him.
What’s more outrageous than having a police officer shoot an unarmed 12-year-old, failing to provide medical care, keeping his family forcibly from the scene, and then declining to indict the officer for the death? In most cases, little. But the city of Cleveland has found a way: It is suing Tamir Rice’s family for not paying the ambulance bill after a Cleveland cop shot and killed the boy in November 2014.
As the Scene reports, Cleveland has filed a claim in probate court, seeking $500 from Rice’s estate to pay for emergency medical services rendered after Officer Timothy Loehmann fatally shot the boy. The charge is especially galling because Loehmann and another officer apparently had no training or equipment to provide aid to Rice after they shot him. They did nothing for four minutes until an FBI agent who happened to be nearby took over.
A new report from OkCupid finds that American daters are growing more traditional in some ways, and more open-minded in others.
It was the best of times, it was the worst of times, it was Carrie Underwood’s time. It was the age of wisdom, but also of low-rise jeans. It was only just over a decade ago, but oh, how things have changed since 2005.
The dating site OkCupid had launched the previous year, and it’s been asking its users questions about their relationship preferences ever since. This week, the company released a survey comparing the responses they received in 2005 to those collected in 2015. Though not as rigorous as a truly random survey, the data hint at changing views of sex, love, and gender norms among online daters in the U.S.
Surprisingly, OkCupid found that people have become more sexually conservative in certain ways. For example, fewer people now say they would have sex on the first date:
If Bernie Sanders is serious about a political transformation in America, he needs a better plan.
If there’s one thing that fires up Bernie Sanders supporters—and makes his detractors roll their eyes—it’s his call for a “political revolution.” To his base, it’s the very point of his anti-establishment, anti-elite candidacy. To his critics, it’s the very embodiment of his campaign’s naïve impracticality and vagueness.
But now that voters in Iowa and New Hampshire have spoken, it’s time to take the idea of political revolution more seriously—more seriously, indeed, than Sanders himself appears to have. It’s time to ask: What exactly would it take?
It starts with Congress. And here it’s instructive to compare Sanders and Donald Trump. Both rely on broad, satisfying refrains of “We’re gonna”: We’re gonna break up the big banks. We’re gonna make Mexico build the wall. We’re gonna end the rule of Wall Street billionaires. We’re gonna make China stop ripping us off.
The two insurgents want to take America in radically different directions—with Donald Trump looking to keep the world out and Bernie Sanders looking to bring it in.
Pundits keep reminding us that the two men who won New Hampshire, Donald Trump and Bernie Sanders, are both “outsiders.” But that doesn’t mean much. George Wallace and George McGovern were both outsiders, too. While the Trump and Sanders campaigns both represent insurgencies against party elites, they represent insurgencies aimed at taking America in radically different directions. One way of understanding those different directions is through American exceptionalism. Sanders voters want to make America more like the rest of the world. Trump voters want to keep America a nation apart.
American exceptionalism has meant different things at different historical periods. But today, it generally denotes Americans’ peculiar faith in God, flag, and free market—a religiosity, a nationalism, and a rejection of socialism and class-consciousness that distinguishes the United States from other advanced democracies. The Sanders campaign represents an assault on all three. From H.G. Wells to Karl Marx, foreign observers have long fingered America’s lack of socialism as a key characteristic distinguishing it from Europe. But Sanders is a democratic socialist; he doesn’t run from the term. And neither do his backers. In a January poll of likely caucusgoers in Iowa, The Washington Post reported that more Democrats called themselves “socialists” than “capitalists.” Sanders’s socialism is especially popular among the young. A 2011 Pew Research Survey found that while Americans 65 and older favored capitalism over socialism by 39 points, Americans under 30 favored socialism.
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.
When two black holes collide, the noises scientists hear are birdlike.
This morning, scientists from the Laser Interferometer Gravity Observatory announced that LIGO had detected gravitational waves from the collision of two black holes, an event so cataclysmic that it converted the mass of three solar systems into pure energy in about a tenth of a second.
Scientists have been trying to figure out how to “listen” to gravitational waves—and to prove their existence—ever since Einstein predicted them in 1915. But until September 14, 2015, when the colliding black-hole event was first detected, this was beyond our technical abilities. In the words of Scott Hughes, “Gravity is a weak force. Measuring these things is bloody hard.”
Hughes is a theoretical physicist at MIT who has been contemplating LIGO since its inception in 1992. He has struggled with a question at the heart of the observatory program: Once we do hear gravitational waves, how will we know where they come from? How can we use them to explore the mysteries of the cosmos? To this end, Hughes has modeled the “sounds” of a host of astrophysical events, including colliding black holes. (You can listen to his impressions of these sounds below.)
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.
For decades, some psychologists have claimed that bilinguals have better mental control. Their work is now being called into question.
In one of his sketches, comedian Eddie Izzard talks about how English speakers see bilingualism: “Two languages in one head? No one can live at that speed! Good lord, man. You’re asking the impossible,” he says. This satirical view used to be a serious one. People believed that if children grew up with two languages rattling around their heads, they would become so confused that their “intellectual and spiritual growth would not thereby be doubled, but halved,” wrote one professor in 1890. “The use of a foreign language in the home is one of the chief factors in producing mental retardation,” said another in 1926.
A century on, things are very different. Since the 1960s, several studies have shown that bilingualism leads to many advantages, beyond the obvious social benefits of being able to speak to more people. It also supposedly improves executive function—a catch-all term for advanced mental abilities that allow us to control our thoughts and behavior, such as focusing on a goal, ignoring distractions, switching attention, and planning for the future.
The ancient civilization may have tracked Jupiter using sophisticated methods, but their reasons for stargazing were very different than ours.
We’ve never escaped the influence of the Babylonians. That there are 60 seconds in a minute, 60 minutes in an hour, and 360 degrees in a full circle, are all echoes of the Babylonian preference for counting in base 60. An affinity for base 12 (inches in a foot, pence in an old British shilling) is also an offshoot, 12 being a factor of 60.
All this suggests that the Babylonians had a mathematics worth copying, which was why the Greeks did copy it and thereby rooted these number systems in Western tradition. The latest indication of Babylonian mathematical sophistication is the discovery that their astronomers knew that, in effect, the distance traveled by a moving object is equal to the area under the graph of velocity plotted against time. Previously it had been thought that this relationship wasn’t recognized until the fourteenth century in Europe. But since historian Mathieu Ossendrijver of the Humboldt University in Berlin found the calculation described in a series of clay tablets inscribed with cuneiform writing in Babylonia during the fourth to the first centuries B.C.E., where it was used to figure out the distance traveled across the sky by the planet Jupiter.