The fiscally conservative case to borrow and spend -- and feel good about it
What if borrowing money made you so much richer over the long-term that it paid for itself? It's not crazy. Millions of families make such a decision every year when they take on debt to pay for school. Indeed, investing in yourself is a bet that often pays off. But can the same be true for an entire country?
Brad DeLong and Larry Summers say yes. In a provocative new paper, they argue that when the economy is depressed like today, government spending can be a free lunch. It can pay for itself.
It's a fairly simple story. With interest rates at zero, the normal rules do not apply. Government spending can put people back to work and prevent the long-term unemployed from becoming unemployable. This last point is critical. If people are out of work for too long, they lose skills, which makes employers less likely to hire them, which makes them lose even more skills, and so on, and so on. Even when the economy fully recovers, these workers will stay on the sidelines. It's not just these workers who suffer from being out of work. We all do. High unemployment is a symptom of a collapse in investment. If we don't make needed investments now, that will put a brake on growth down the line. Together, economists call these twin menaces hysteresis. And if it sets in, it reduces how much we can do and make in the future. Assuming that spending now can forestall hysteresis, then this spending might be self-financing. In other words, spending now might "cost" us less than not acting.
This doesn't mean that government spending is magic. Often, it's anything but. But this is a special case. DeLong and Summers identify three factors that determine whether fiscal stimulus will pay for itself: 1) how much hysteresis hurts future output, 2) the inflation-adjusted interest rate, and 3) the size of the fiscal multiplier. Let's consider these in turn.
THE MONSTER OF HYSTERESIS
Economists know a lot about a lot of things. Hysteresis is not one of them.
Indeed, it's not clear whether long-term unemployment and investment shortfalls really do damage potential growth over the really long-term. Maybe hysteresis "only" wounds us for the next 20 years, but not the next 40 years. Unfortunately, there's reason to fear that this is optimistic. A recent paper by Stephen Davis and Till von Wachter finds that workers who are laid off during recessions -- who presumably take longer to find a new job -- take worse hits to their lifetime earnings than do workers who are laid off during good times. Lasting unemployment has lasting consequences. That should terrify our policymakers.
The below chart from DeLong and Summers shows the unemployment rate versus the percentage of working-age people who are actually working. Any divergence between the two shows us how many people have given up on trying to find a job after being out of work for too long. The recent numbers paint a frightening picture.
While quantifying just how much this will hurt our long-term productive capacity is a matter of guesswork, DeLong and Summers show that it doesn't have to be much to justify doing something now -- provided that rock bottom interest rates super-charge fiscal stimulus.
DeLong and Summers argue that real rates -- that is, adjusted for inflation -- don't have to be that low to make more spending a good deal. They calculate that real rates of anywhere between three and seven percent make fiscal stimulus worthwhile. Inflation-adjusted rates are negative now. But low rates don't only make borrowing cheaper. They might also make government spending more effective.
STIMULUS THAT WORKS: A BLACK SWAN, NOT A UNICORN
Government spending usually doesn't increase growth. Or, as economists put it, "the fiscal multiplier is usually close to zero." The multiplier just refers to how much total spending a dollar of government spending generates. For instance, if the government spends $1 billion and GDP goes up by $1.5 billion, then the multiplier would be 1.5. In normal times, the multiplier is zero, because the Federal Reserve offsets any additional spending. The Fed has its inflation target, and if more government spending pushes up inflation, then the Fed neutralizes it by raising interest rates. But with short-term rates hugging zero and inflation falling below target, this calculus might change. The Fed might allow the multiplier to be greater than one. And that would certainly make more spending a very good deal.
There are two broad objections to the notion that the fiscal multiplier might be quite high right now. First, just because short-term interest rates are at zero doesn't mean the Fed is out of ammunition. The Fed can still buy long-term bonds -- aka quantitative easing -- or tell markets that it will keep short-term rates low for an extended period. These things matter. If fiscal stimulus precludes the Fed from doing more monetary stimulus, then the apparent multiplier will be misleading. Second, it's hard to find many historical examples of a high fiscal multiplier. Critics like to point out that even during World War II -- when interest rates were also negligible -- that the multiplier was no better than during normal times. So, after all of this, does this mean that government spending isn't worth it?
Not so fast. Just because the Fed can use unconventional policy doesn't mean that fiscal stimulus is a waste. Much of the Fed's current strategy involves making (quasi) promises to keep rates low for a long time -- till late 2014, to be exact. It's a very watered down version of what Paul Krugman called "credibly promising to be irresponsible". The problem, though, is credibility. Markets might not believe the Fed. Actually, they don't. And that means that spending wouldn't be canceled out nearly as much right now. As for past instances of a high multiplier, World War II actually does offer solid evidence. You just need to know when to look. While we were actively fighting in the war, the government imposed private sector rationing. So it's hardly surprising that government spending didn't spur on private spending when the private sector was forbidden from spending. But here's an oft-forgotten fact: we started spending on the war long before we entered the war -- to help arm Great Britain. Those were our "arsenal of democracy" days. More importantly, there was no rationing from 1939-41. Over this period Robert Gordon and Robert Krenn found that the multiplier was as high as 1.8. That's really, really good.
The Cliff Notes version of all of this is that a fiscal multiplier greater than one is not a unicorn. It's more like a black swan. It exists. It's just rare. And this looks like one of those rare times. Taken together with our historically low rates, now seems like a great time to make some investments in ourselves. Putting the long-term unemployed back to work is an investment in their human capital. Refurbishing roads and bridges is an investment in the physical infrastructure we need to keep competing globally. Both make us better off in the long run, and could conceivably pay for themselves. Of course, none of the above means that the Fed can't or shouldn't try to do more. It's more of a practical appraisal about what the Fed will -- and won't -- do.
Usually comparing the government's budget to a family's budget is a bad idea. Governments can borrow for far longer and on far better terms. And, counterfeiters aside, families can't print money. But in this case it's a worthwhile comparison. A family struggling to make ends meet wouldn't be wise to save money by pulling their kids out of college if they can afford tuition. Similarly, governments running massive deficits during a depression wouldn't be wise to embrace austerity if markets will lend to them on favorable terms. In both cases, the long-term damage outweighs any short-term benefit.
Which is to say: When people offer you free money, don't say no.
The MIT economist Peter Temin argues that economic inequality results in two distinct classes. And only one of them has any power.
A lot of factors have contributed to American inequality: slavery, economic policy, technological change, the power of lobbying, globalization, and so on. In their wake, what’s left?
That’s the question at the heart of a new book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, by Peter Temin, an economist from MIT. Temin argues that, following decades of growing inequality, America is now left with what is more or less a two-class system: One small, predominantly white upper class that wields a disproportionate share of money, power, and political influence and a much larger, minority-heavy (but still mostly white) lower class that is all too frequently subject to the first group’s whims.
As the president nears his hundredth day in office, he seems increasingly concerned about how he’ll measure up.
As he approaches his hundredth day in office, Donald Trump appears to be suffering—once again—from an acute case of presidential status anxiety.
In public, of course, he has labored to play it cool, strenuously insisting (and insisting, and insisting) that he does not care about the “first hundred days” metric that historians and pundits have used to evaluate the success of new administrations since FDR. Trump has called this milestone “ridiculous” and “artificial”—a meaningless media fixation. And yet, the less-than-laudatory press reviews seem to have left him seething. For evidence, look no further than the president’s pathos-drenched Twitter feed, where he recently took to vent, “No matter how much I accomplish during the ridiculous standard of the first 100 days, & it has been a lot (including S.C.), media will kill!”
In 1985, Neil Postman observed an America imprisoned by its own need for amusement. He was, it turns out, extremely prescient.
Earlier this month, thousands of protesters gathered at Washington’s National Mall to advocate for an assortment of causes: action against global climate change, federal funding for scientific research, a generally empirical approach to the world and its mysteries. The protesters at the March for Science, as scientists are wont to do, followed what has become one of the established formulas for such an event, holding clever signs, wearing cheeky outfits, and attempting, overall, to carnivalize their anger. “Make the Barrier Reef Great Again,” read one sign at the March. “This is my sine,” read another. “I KNEW TO WEAR THIS,” one woman had written on the poncho she wore that soggy Saturday, “BECAUSE SCIENCE PREDICTED THE RAIN.” Three protesters, sporting sensible footwear and matching Tyrannosaurus rex costumes, waved poster boards bearing messages like “Jurassick of this shit.”
President Trump, in an interview with Reuters, also said while he would “love to solve things diplomatically … it’s very difficult.”
President Trump says “[t]here is a chance that we could end up having a major, major conflict with North Korea.” The comments, which were made to Reuters in an interview, come two days after senior members of his administration, in a joint statement, tried to defuse tensions with the communist state, saying the U.S. remained open to talks.
Trump suggested in the interview that while he would “love to solve things diplomatically … it’s very difficult.” The subject of North Korea’s nuclear-weapons program has been a U.S. priority since at least the Clinton administration—though efforts to denuclearize the Korean peninsula began during the George H.W. Bush administration. But despite bilateral and multilateral diplomatic efforts undertaken by Presidents Bill Clinton, George W. Bush, and Barack Obama, North Korea’s nuclear technology has improved, and many experts believe that it could be capable of firing a nuclear-armed missile that could reach Seattle in the next few years.
“Somewhere at Google there is a database containing 25 million books and nobody is allowed to read them.”
You were going to get one-click access to the full text of nearly every book that’s ever been published. Books still in print you’d have to pay for, but everything else—a collection slated to grow larger than the holdings at the Library of Congress, Harvard, the University of Michigan, at any of the great national libraries of Europe—would have been available for free at terminals that were going to be placed in every local library that wanted one.
At the terminal you were going to be able to search tens of millions of books and read every page of any book you found. You’d be able to highlight passages and make annotations and share them; for the first time, you’d be able to pinpoint an idea somewhere inside the vastness of the printed record, and send somebody straight to it with a link. Books would become as instantly available, searchable, copy-pasteable—as alive in the digital world—as web pages.
Recent border battles have once again redrawn the lines of the metro area.
On the Saturday before Election Day last November, Jason Lary, a former insurance executive, crouched on a rough patch of grass at the center of a busy intersection 20 miles outside of Atlanta in DeKalb County. Lary was holding a hammer, and he tapped carefully on the thin wire base of a campaign sign. “My hand is like Fred Flintstone’s right now because I banged my hand in the night,” he said, noting his latest sign-related injury. This hazard, though, was worthwhile: “If you don’t start [the sign] with your hand, it will bend. It takes longer—guys are 10 times faster than I am. But my sign’s still gonna be up.”
This was a non-trivial advantage for Lary, who for the past month had begun most mornings with a kind of ground-game whack-a-mole. He would put up signs under the cover of night, only to have his opponents dislodge them by hand or, when that failed, run over them with their cars. Nevertheless, Lary was feeling good. “My opposition? Worn down,” he told me. “They don’t even have any more signs. And I kept a stash, knowing this time was coming. This is not my first picnic with nonsense.”
New presidents often err by either trying to impose their will on Congress or being too hands-off. Trump is on course to commit both errors on his top two legislative priorities.
Mucking up an interaction with Congress is a rite of passage for every new president—usually on health care, and especially for those with limited experience in Washington.
The twin pitfalls for a new president are the same ones the great Tommy Lasorda described in his approach to baseball: “I believe managing is like holding a dove in your hand. If you hold it too tightly you kill it, but if you hold it too loosely, you lose it.” A president can try to push his vision aggressively on Congress, risking backlash from members—let’s call that the Bill Clinton approach. Alternatively, he can try to hang back and let Congress act, risking the chance that without presidential leadership, members will come up with something he doesn’t like, or even worse that they can’t pass. We’ll call that the Barack Obama approach.
Princeton freshman Tal Fortgang was right that "privilege" is a problem, but not about why.
Poor Tal Fortgang. (Well, perhaps “poor” isn’t the right word.) Not long ago, the Princeton freshman’s white male privilege was known only to those in his life. Then he published an essay about this privilege in a conservative student publication, arguing that because his ancestors had struggled, he personally doesn’t benefit from unearned advantage. If he’s not privileged, no one should be asking him to check his privilege, right? After all, some of his advantage was earned; he just doesn’t happen to be the one who earned it.
Because “privilege” is clickbait, Fortgang’s piece made the rounds, culminating in the New York Times interviewing his classmates about his privilege and whether he had, in fact, checked it. The consensus is that he did not. Fortgang’s privilege has now been checked not only by his classmates and Facebook friends but by the entire Internet.
All over America, people have put small "give one, take one" book exchanges in front of their homes. Then they were told to tear them down.
Three years ago, The Los Angeles Times published a feel-good story on the Little Free Library movement. The idea is simple: A book lover puts a box or shelf or crate of books in their front yard. Neighbors browse, take one, and return later with a replacement. A 76-year-old in Sherman Oaks, California, felt that his little library, roughly the size of a dollhouse, "turnedstrangers into friends and a sometimes-impersonal neighborhood into a community," the reporter observed. The man knew he was onto something "when a 9-year-old boy knocked on his door one morning to say how much he liked the little library." He went on to explain, "I met more neighbors in the first three weeks than in the previous 30 years."
The House and Senate voted to extend federal funding for another week, averting a shutdown to buy more time for negotiations on a large spending bill.
Updated on April 28 at 12:05 p.m. ET
President Trump isn’t getting a health-care vote to mark his 100th day in office, but he won’t be saddled with a government shutdown, either.
The House and Senate voted in quick succession on Friday morning to extend federal funding for another week past a midnight deadline as negotiators try to reach an agreement on a large spending bill for the remainder of the fiscal year.
Democrats had briefly threatened to hold up the stopgap measure if Republicans tried to jam through their stalled American Health Care Act. But GOP leaders still can’t find enough support among their members for the proposal, and their decision on Thursday night to again put off a vote defused—for now—the shutdown threat.