TIME nation

An Economic Checkup

Economist Martin Feldstein on the state of the recovery

The U.S. economy is at a critical juncture. The Federal Reserve’s very easy monetary policy during the past few years has been the root of both good and ill: reduced unemployment on the one hand and increased financial risks on the other. The danger now is that the inevitable rise in interest rates over the next few years could cause substantial losses to banks and investors that, in turn, could weaken the economy’s overall performance and lead to another economic downturn.

The Federal Reserve’s unconventional monetary policy during the past five years–the combination of massive purchases of long-term bonds and its promise to keep short-term rates very low for a very long time–caused a sharp rise in the stock market and in the prices of owner-occupied homes. Together these raised household net worth by some $10 trillion in 2013. This large increase in wealth caused households to raise their spending and businesses to invest in new capacity. That increase in spending raised employment by enough to drive the unemployment rate down to just 5.4%. But the very easy monetary policy has also left us with dangerously low interest rates and overvalued assets.

With the overall unemployment rate down to 5.4% and the rate among college graduates at only 2.7%, there is little or no slack left in labor markets. As a result, labor costs are now rising at a faster rate. Compensation per hour in the nonfarm business sector rose at a 3.1% rate in the first quarter of this year, up from 2.5% in 2014 and 1.1% in 2013.

Rising labor costs usually lead to a higher rate of price inflation. This time inflation has temporarily been kept in check by the decline over the past year in the prices of gasoline and other forms of energy and by the rising dollar’s impact on the cost of imported goods. But those offsetting forces are shifting into reverse. With oil prices recently up from their lows and the dollar no longer rising, inflation will be heading higher in the year ahead.

Although there have recently been some mixed signals about the strength of demand, the economy will remain on a solid growth path for the coming year unless it is upset by events in the financial markets. Real inflation-adjusted GDP grew at more than 4% in the second half of 2013, driven by the rise of household wealth. Bad weather weakened the economy in the first quarter of 2014, but after that consumer spending and business investment together continued to rise at an annual rate of more than 4%.

The first quarter of the current year was again very weak because of terrible weather and other temporary forces. But those things are behind us, and the economy is recovering. Since households’ real after-tax incomes have increased at an annual rate of 4.5% in the most recent six months and employment prospects are strong, consumer spending is now likely to pick up. A rapid increase in housing starts–up more than 9% in April from a year earlier–will reinforce the stronger ordinary consumer spending. Because output can no longer be increased by significant reductions in unemployment, the potential pace of future GDP growth is likely to be limited to about 3%.

For the longer term, the economy faces a serious issue of preventing the projected explosion of the national debt. The ratio of the national debt to GDP has doubled in the past decade, from roughly 35% to about 75%. It is projected to start rising again in the near future, heading to 100% of GDP and higher unless legislative action is taken.

It is impossible to avoid the growth of the government debt by limiting increases in government spending on defense or on the budget items that are labeled as “nondefense discretionary,” i.e., federal-government domestic spending other than Social Security and Medicare. The defense budget is already projected to decline by 2025 to only 2.6% of GDP, the lowest level in the past half-century. Similarly, the nondefense discretionary outlays are already projected to decline by 2025 to only 2.5% of GDP, also the lowest level in the past half-century.

Fortunately, the growth of the debt can be limited and the ratio of debt to GDP can be pushed back to earlier levels without cutting outlays for Social Security and Medicare and without raising tax rates. The key is to slow the growth of those outlays and to limit the spending that is built into the tax code by a wide range of tax subsidies to individuals and businesses. This should be the task of the current Congress and the current President, but I think it will have to wait until after the election in 2016. That, together with tax reforms designed to stimulate faster growth, should be the legislative priority in 2017.

Feldstein, the George F. Baker Professor of Economics at Harvard University, was chairman of the Council of Economic Advisers in the Reagan Administration


This appears in the June 08, 2015 issue of TIME.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME nation

Colin Kaepernick Apologizes for ‘Insensitive’ Instagram of Texas Floods

"I didn't fully understand how many people are struggling in Houston right now"

San Francisco 49ers quarterback Colin Kaepernick apologized Tuesday after posting a photo to his Instagram that made light of deadly floods in Texas.

“I warned you the #7tormsComing !!! #Houston,” the NFL star wrote alongside the photo showing cars submerged in water. Kaepernick apparently deleted the post shortly afterward, then tweeted an apology, saying he was “so sorry about my insensitive post earlier today.”

Kaepernick, an outspoken, often criticized athlete, previously found himself in a social media debacle in February when he launched a searing verbal attack against a fan on Twitter.

Read next: Colin Kaepernick Opens Up on Quarterback Sociology, Tattoos, Adoption

TIME Accident

Massachusetts Man Calls 911 After Leaving His Baby in a Car

He will not face charges and the baby was found safe

A man in Massachusetts frantically dialed 911 on Wednesday after he had already boarded a train to let authorities know he forgot his baby daughter was in the back of his car.

The father had dropped off his older child at daycare and then boarded a T train at the North Quincy station, 7News reports. A half hour later, realizing his mistake, he contacted an emergency dispatcher, who contacted police to sent to officers that would find the vehicle.

“While this was one of the worst days of my life, I know that we were also very fortunate as it was a mild temperate day and I had come to my senses before too long,” the man said in a statement. NBC News reports the child was “never in distress” and was later turned over to her mother. The man will not face charges for leaving the child in the car.

[7News]

TIME baltimore

Baltimore’s Mayor Under Fire

America 1968 Baltimore Riots 2015 Time Magazine Cover
Photograph by Devin Allen

Stephanie Rawlings-Blake talks to TIME about why Baltimore erupted, her handling of the crisis and the "thugs" comment

Why did Baltimore explode the way it did?

Baltimore has a long and challenging history with issues of trust or mistrust between the community and the police department. You layer that on to an in-custody death. You layer on opportunists who are looking to co-opt the raw emotion of a community for their own benefit. It makes Baltimore vulnerable and so many other places around the country vulnerable.

How would you say you’ve handled this crisis?

I have to focus on running my city, and that’s what I’m doing. When I look in the mirror, I’m very comfortable with who I see. I’m comfortable with how we’ve responded in very, very challenging times.

Maryland Governor Larry Hogan said he activated the National Guard “30 seconds” after you requested them. Did you get the sense that he was waiting on you?

I got the sense that the governor didn’t have a full understanding of all things that were being put in place. When we are in the midst of dealing with an issue, you have to be very judicious about the use of the National Guard. They’re viewed by the community as a sign of militarization. They’re viewed by many as a sign of escalation of an incident.

Has being a black mayor working alongside a black police commissioner made dealing with this situation any easier?

Do I look like I’m having an easy time? I think it would be hard to take a look at the week that I’ve had to suggest that it’s easier. I can say, for somebody that has grown up in Baltimore and has experienced the pain of loss from the violence that we’ve seen in our streets and has been concerned about my brother and his friends being profiled negatively because they were young black men, I get it.

You found your brother after he was stabbed in a carjacking years ago. Do you see parallels between what happened to him and what happened in the riots?

The kids that did this were the same age of the kids that you saw out there, 15 and 16. And you just–it’s so important that we get this right for our kids that they don’t continue to make these types of devastating mistakes in their life.

But you made comments about “thugs” looting the city and “giving those who wished to destroy space to do that.” Do you regret saying those things now?

I wish I could say that I was a person that never made any mistakes. But I’m not. I’m human. And in the heat of the moment, I said something. I joked and said it was my anger interpreter that was speaking over my shoulder.

But like I said, I’m human. I make mistakes. Hopefully people see that I’m big enough to own ’em. I tried to explain the situation and how–calling the people thugs on that–but on the other thing, I tried to explain a situation and clearly did a poor job. Most of the people sitting in the room understood very clearly what I meant. But sometimes you can have the best of intentions, and I feel pretty decent, like I’m a pretty decent communicator. But you never know how those things–for the people who aren’t in the room, you don’t know how they’re going to be received. And the words that I chose didn’t really reflect my heart and what I meant to say. I would never give space for people to destroy our community.

Read next: The Roots of Baltimore’s Riot


This appears in the May 11, 2015 issue of TIME.
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