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December 2006

Who Are the Real Friends of Israel?

Matthew Yglesias makes the obvious point from Leon Hadar: for his work at Camp David during his presidency, Jimmy Carter is one of the best friends Israel has ever had. By contrast, let me make the point that the writers for the New Republic--along with all the others who coquette with the annexationist fantasies of Likud, and tell Israeli politicians that occupation of the Golan Heights and settlers on the West Bank are a source of strength rather than weakness for Israel--well, you can call them many things, but you cannot truthfully call them real friends of Israel.

Here is Matt:

Matthew Yglesias / proudly eponymous since 2002: This week's Two Minute Hate seems destined to be directed at ex-president Jimmy Carter who's written a book called Palestine: Peace not Apartheid. I don't like the title, either, and, frankly, don't plan to read the book. Still, Leon Hadar (Via Jim Henley) seems to me to have the best overall take on this: "I'm not sure whether Carter doesn't like Israelis or hates Jews but from my perspective, he would go down in history as someone who made a huge contribution to Israel's security through his successful mediation of the Egyptian-Israeli peace treaty."

Quite so. Compare this to the strategic "thinking" of Carter-hater Martin Peretz: "Baker has already informed us of what a successful negotiation between Israel and Syria would mean: a return of the Golan Heights to Damascus. Why would this satisfy the Syrians? They launched their war against Israel when they possessed the Heights. It was theirs." By this "logic" of course, not only were Carter's efforts on behalf of peace between Israel and Egypt misguided, but the Camp David Accords must have been impossible. After all, Egypt went to war with Israel when it already had the Sinai Peninsula, so how could Egypt possibly agree to peace in exchange for getting the Sinai back? Indeed, by Peretz's line of reasoning it should be impossible, in general, for countries to stop fighting wars with each other -- France and Germany would just be doomed to an endless series of armed conflicts.

Nothing Can Match Fafblog

But Alter Ego comes very close:

My Alter Ego Speaks: S = r * t: In his joint press conference with Tony Blair yesterday, President Bush was asked whether he was capable of admitting his past failures with regard to the Iraq war. In response he stated "I do know that we have not succeeded as fast as we wanted to succeed," and went on to say "I thought we would succeed quicker than we did, and I am disappointed by the pace of success."

Brilliant! Sheer genius! I tip my hat to the master of rhetoric behind these words! By applying this approach to my problems and those of the people in my life, I am able to see the world in a much more positive light. For example:

  • I am disappointed by the pace at which I am winning the powerball lottery.
  • [Censored: this is a family weblog.]
  • My nephew who dropped out of high school and is now dealing crystal meth? We are all disappointed by the rate at which he is finishing his doctoral dissertation.
  • My plan to grow wings and antlers is slightly behind schedule.

There now, I feel better already!

My plan to grow a prehensile tail is much more sound than his plan to grow wings and antlers. But it too is slightly behind schedule.

Remove George W. Bush from office. Do it now.

Alex Tabarrok Performs a Miracle

He makes me want to go see the new Mel Gibson movie, Apocalypto:

Marginal Revolution: Negative real rates of return, part II: Apocalypto, yes storage costs for goods are positive in the movie. The film is about theology; virtually frame-by-frame it is commentary on Passion of the Christ, the Bible, or both. Call it mishnah, if you wish; the reviews I read didn't get this at all. The movie's central question is what the idea of a miracle, or salvation, can mean in a non-Christian world. I found it remarkable, but I can't imagine it drawing many viewers beyond the curious, the omnivorous, the Mayan, and the deeply committed.

R.I.P. Jeane J. Kirkpatrick

Let me express my condolences to her two surviving sons John Evron and Stuart Alan Kirkpatrick, whom she loved beyond all measure.

She was a good friend to my grandfather Earl. She was an American and a world patriot: her counsel--even at its most boneheaded--was always devoted to advancing the security of the United States and the cause of liberty and prosperity around the world.

The Best of Spencer Ackerman Weekly--December 9, 2006 Edition

I continue to get great value from my $60 two-year subscription to Spencer Ackerman weekly ( Here are this week's highlights: (1) Never fire your best polemicist. (2) On the Iraq Study Group. (3) On the Party of Ali in Iraq. (4) On why Heidi Klum would have been a better chair for the ISG than James Baker. (5) And, finally, becoming completely unhinged through reading Left Behind.

(1) Never fire your best polemicist:

toohotfortnr: Wow, I didn't expect to be so angry -- like, hands-quivering angry -- when I read this week's T[he ]N[ew ]R[epublic] lede, which I gather was written by Leon [Wieseltier]. But here it is:

But at least it is no longer defeatist or heretical or treasonous or (the most absurd muzzle of all) cruel to the troops to articulate lucidly the magnitude of the mess in Iraq and the steady dwindling of America's power to achieve its goals.

How many times, guys? How many times did you intimate to me that I was in league with the terrorists when I told you to get out of Iraq? Hey, Leon, do you remember the editorial meeting after the Blackwater lynching in late March 2004? That was the first time I said I thought the war was unwinnable, and that was the first time you told me ("joking," of course) that I was fired. Yeah, it was funny the first time, I guess, but after the next hundred, the joke gets kind of old.

And I notice you stop short of giving your blessing of seriousness to the idea of withdrawal, "which is politically the most sensational question." Guys, if you don't know what you think about the issue, just say so. It's a bit rich to chastise Baker et. al. for evasiveness while committing your own evasions. Of course, Leon writes these ledes on the late afternoons of the day (Wednesday) that the magazine closes, so you can't really expect much depth. How tragic that they believe it's better to mean nothing than to say nothing...

(2) On the Iraq Study Group:

TAPPED: MORE IMPORTANTLY? I spent my morning at the Iraq Study Group's press conference on the Hill. (I'll have a piece for TAP on all this imminently.) Many bizarre things were said, but one that revealed the ISG's midset particularly well was this, courtesy of co-chair Lee Hamilton:

"We have one last chance at making Iraq work, and, more importantly, one last chance to unite this country on this war."

Jigga what? Why is it more important to rally the country behind a war that has only "one last chance" to it? Why is it important at all? What's the virtue of uniting behind a mission that's crashing and burning? And, if you believe that it's really important to "win" (or, at least, "not lose") the war, why would you possibly think that uniting the country behind that objective is even more important than the objective itself?...

(3) On the Party of Ali in Iraq:

Abdul Aziz al-Hakim, leader of SCIRI and commander-in-chief of the fearsome Badr Corps, left his meeting today with President Bush for a brief appearance at the U.S. Institute of Peace this afternoon. I asked Hakim: You've been accused of the abduction, torture and execution of perhaps thousands of Sunnis. How do you respond?

He said, through a translator: "Those are only accusations. We deny them all, we reject them all. There is no evidence of any of that. It happens that there was an armed group by the name of the Badr Brigade, but by the order of Sayyid Mohammed Bakr al-Hakim [Abdul Aziz's murdered brother], they became a civil group known as the Badr Organization in 2003. Since then there has been no violence by them, no fighting."

There you have it! Hakim also wants to see the civil war escalate, according to his prepared remarks: "The strikes that [Sunni insurgents, takfiris -- his term -- and Baathists] are getting from the multinational forces are not hard enough to put an end to their acts, but leave them [to] stand up again to resume their criminal acts. This means that there is something wrong in the policies taken to deal with that danger threatening the lives of the Iraqis. Eliminating the danger of the Civil War in Iraq could only be achieved through directing decisive strikes against takfiris [the prepared statement, corrected by the translator, reads "terrorists" here], Baathists [and] terrorists in Iraq. Otherwise we'll continue to witness massacres being committed every now and then against the innocent Iraqis."

(4) On why Heidi Klum would have been a better chair for the ISG than James Baker:

American Prospect Online - No Middle Ground: Given the specific lineup of the 10 wise men and women serving on the Iraq Study Group, the most conspicuous absence is that of supermodel Heidi Klum. Sure, she has no relevant experience in foreign policy, nor any real knowledge of Iraq -- but neither do commissioners Sandra Day O'Connor, Vernon Jordan, Alan Simpson, or Edwin Meese. What Klum does have to offer is a lesson completely lost on the commission, one taught each week on her hit reality show Project Runway: you're either in, or you're out. When it comes to Iraq, it's good advice.

From the commission's perspective, however, such advice would represent a dangerous breakdown of Washington's most enlightened foreign-policy tradition -- that is to say, bipartisanship.... Its report refuses to bless the idea of sending new combat forces to Baghdad... and it also blanches at what Baker called "precipitous withdrawal," the position held by many in the Democratic Party, the country as a whole, Iraq, and the world....

[T]he Iraq Study Group is ultimately providing false hope for an extended war. Its assessment is appropriately bleak. For example, "Key Shia and Kurdish leaders," the commission finds, "have little commitment to national reconciliation." Now, given that these leaders comprise the Iraqi government, one might think that would lead to the conclusion that Iraq is doomed to an intensifying sectarian conflict, and unless one believes it is in the United States' interest to pick a side in someone else's civil war, that means it's time to go home. Instead, the commission, despite its own better judgment in its report, is gearing up for what Hamilton called "one last chance at making Iraq work." It's hard to see what's responsible about this....

[T]he commissioners say that we "must not make an open-ended commitment to keep large numbers of American troops deployed in Iraq." But that's exactly what the commission's recommendation entails.... [T]he commission's assessment of the Iraqi government undermines its recommendations.... The Shiites are said to be "hostage to extremes." The Sunnis "have not made the strategic decision to abandon violent insurgency in favor of the political process."... And the Kurds want out.... [E]ach side believes it has more to gain through war than through negotiation....

Where it goes wrong is in its recommendation that we should be actively supporting an Iraqi political process that is hostage to such dysfunction and sectarian chaos. After all, if none of the relevant actors within the Iraqi government or in the political structure at large is interested in peace, pressuring them to just make nice with one another isn't going to work....

There is something of an upshot to the commission... it will shift the Iraq debate in favor of the modalities of extrication.... Bush will have a very hard time recommitting the country to a chimerical "victory" in Iraq. But in the name of "responsibility," thousands more will die, for years and years, as the situation deteriorates further. Someone, at sometime, will finally have to say "enough," and get the United States out...

(5) And, finally, becoming completely unhinged through reading Left Behind:

...the worst and most repugnant novel ever to have sullied my eyeballs: the first in the Left Behind series.... Leave aside for one second the hideous plot. The series' two authors, Tim LaHaye and Jerry B. Jenkins, mangle the language in a way I haven't seen since high school. At one point they employ the image of a juggernaut sailing across the waters....

All right, a second is up. Left Behind is a despicable revenge fantasy perpetrated with a malicious heart by the sort of vile believer who sees only impurity around him. It hinders his ascension, and he must have satisfaction. So many so-called Christians are left behind after the rapture, and the sneering attitude by LaHaye and Jenkins informs you that they told you so.

The novel's enemies are familiar. Perfidious Europe. The secular and venal national media. The United Nations. The Jew. There's even Catholic-bashing of the ancient vintage: the unraptured President of the United States is an earthy lout named Gerry "Fitz" Fitzhugh. The Jew is my favorite enemy, of course. Israeli Dr. Chaim Rosenzweig creates a formula to make the desert bloom (thanks for that Ben-Gurion reference, assholes) and uses his resulting prestige to usher the Antichrist onto the world stage. Hey Krauthammer, these are your friends here.

This one passage, I think, sums the whole wretched thing up. Our hero, Buck Williams, ace reporter for the Global Weekly, first gets introduced to God when he witnesses the miraculous destruction of the Russian Air Force as it attacks Israel....

Why, Buck wondered.... [W]hat despicable kind of subhuman creature had he become, that even the stark evidence of the Israel miracle--for it could be called nothing less--had not thawed his spirit's receptiveness to God?

"What despicable kind of subhuman creature"! They're talking about you. Because they are the righteous.


Memo to self: find out when the PSAT/NMSQT "selection index" shifted from being math+verbal to reading+writing+math.

Impeach George W. Bush Now

I don't believe it. Jim Henley makes a catch:

Because We Care: Reuters finds the most important tidbit in the ISG report:

Among the 1,000 people who work in the U.S. Embassy in Iraq, only 33 are Arabic speakers and only six speak the language fluently, according to the Iraq Study Group report released on Wednesday.

"All of our efforts in Iraq, military and civilian, are handicapped by Americans' lack of knowledge of language and cultural understanding," the bipartisan panel said in its report. "In a conflict that demands effective and efficient communication with Iraqis, we are often at a disadvantage."

The report, written by five Republicans and five Democrats, recommended the U.S. government give "the highest possible priority to professional language proficiency and cultural training" for officials headed to Iraq.

Guys? It's too late. The time to start to instill competency in the language and culture of the society you're trying to scare-quotes transform is not more than four years after deciding to take the place over.

The ignorance issue has two roots: Americans aren't great at foreign languages and cultures anyway.... The second root is the "humiliate and free" coalition: contempt and anger embedded with "benevolent hegemony" from the start. As with Judith Miller and MET Alpha, it could be difficult to tell who was leading whom. DOD tarred anyone with much knowledge of or sympathy for Arabic language or culture as an "Arabist" and kept them as far away from the project as possible. Ignorance was purity. Who needs a vocabulary when you've got armor?

And Abu Aardvark makes another:

Abu Aardvark: Iraq Study Group: the full report:

"There is significant underreporting of the violence in Iraq... For example, on one day in July 2006 there were 93 attacks or significant acts of violence reported. Yet a careful review of the reports for that single day brought to light 1,100 acts of violence. Good policy is difficult to make when information in systematically collected in a way that minimizes its discrepancy with policy goals." (pp.94-95)

Doesn't sound like Baker-Hamilton was much impressed with the "why don't you tell us the good news from Iraq" crowd... or with the Dorrance Smith-style approach of making reporting of the war to the home front a top priority.

Impeach George W. Bush. Impeach him now.

Frontiers of Consumption

Private jets:

Far From Extinct - New York Times: The 747-8 is even being sold and outfitted by Boeing as a private jet much like Air Force One, which is a 747. Each plane carries a list price of about $275 million. Boeing will not identify the customers, but many in the aviation world say the orders are probably coming from people in the Middle East who are flush with oil riches. They are historically big buyers of Boeing jets for personal use.

Applied Utilitarianism and Global Climate Change

The extremely sharp Partha Dasgupta writes, apropos of the Stern Review, his Comments on it, and my take on those comments.

I had written:

Partha Dasgupta makes a mistake. This is a rare, rare, rare event.... In the "deterministic economy where the social rate of return on investment is, say, 4% a year" model that Dasgupta is using, the concept of "output" Y is Haig-Simons output--what you could consume and still leave the economy next year with the same productive capacity.... With that definition of output Y, with consumption level C, and with social rate of return on investment r, it is indeed the case that... the assumed values for r[=4%], δ[=0.1%], and η[=1] give us a 3.9% per year growth rate of consumption. If you impose the steady-state requirement that the growth rates of consumption and output be the same, you do indeed get a 97.5% savings rate--that consumption is 2.5% of Haig-Simons output:

C/Y = .025

because with r=4% per year that is the only way to get g(Y)=3.9%

But suppose that you use a different concept of output--GDP--and say that productive capacity increases not just because you save some of GDP but also because of improvements in knowledge and technology g(A), so that:

g(Y) = r(1 - C/Y) + g(A)

with worldwide g(A) equal, say, to 3% per year. Then our g(C) equation still gives us a 3.9% per year total economic growth rate, but our g(Y) equation is then:

3.9% = g(Y) = r(1 - C/Y) + g(A) = 4%(1 - C/Y) + 3%

which gives us a savings rate not of 97.5% of Haig-Simons output but rather of 22.5% of GDP, leaving 77.5% of GDP for consumption... far from absurd....

That being said, I agree with most of Dasgupta's major point: the action here is in the choice of the parameter η. I think it's appropriate to consider different ηs in the range from 1 to 5, and think the Stern Review should have done so.

Now Partha Dasgupta writes:

Partha Dasgupta:

Dear Professor DeLong,

I... fail to see in what way I made a mistake. In the classroom exercise I was considering, I assumed a constant-population/no-technological-change scenario, to get a sense of what low values of eta do in hypothetical instances. You could certainly counter that in conducting such exercises one should also consider technological change, as you do.

With a 3% per year figure for the residual, one gets much more satisfactory figures for the optimum saving ratio for the delta-eta values in the Stern Review. But my purpose, in what was a piece for non-economists, was to show how little prior intuition we all have for such important parameters as eta and delta. To suppose in a class room exercise that the rate of technological progress is zero is not a mistake, it's to field a parameter value so as to explore the implications of other parameter values.

And by the way, there is no obvious ethical reason why eta should be a constant.

I feel bad being having become involved in this debate. For the past thirty years I have tried to bring ecological concerns into contemporary economic thinking. I have believed for some time that climate change is the most all-embracing problem humanity faces today and would be happy to vote for a 1.8% of the GDP of rich countries on expenditure to confront the problem. On the other hand, I am too much of an academic economist not to force economic reasoning to bear on a document that is on the economics of climate change.

I wonder whether I could ask you for a favour. On having printed out your piece in your semi-daily journal, I find that people place their responses in it. I wonder whether you could do lift this letter and place it in your column....

I hope you and your readers will not mind if I were to elaborate on the need for classroom exercises to sharpen one's intuitive feel for such concepts as delta (the time/risk-of-extinction discount rate) and eta (the measure of inequality/risk in consumption). One can't obtain an intuitive feel from the huge computer models, because one can't track what's influencing what in any sharp way.

The exercise you conducted in your piece on my piece on the Stern Review is, like mine, a classroom exercise. To suppose that the rate of technological change is going to be 3% per year forever is also to assume something with weak support. Our experience of significant technological progress - in the sense of the g(A) in your notation - isn't much more than 250 years old. When taken in the context of a 11000 year sedentary history, that's not much to go on.

To take another, not implausible, classroom example, suppose the rate of technological change was taken to be, say, 1% a year. Keeping the values of the other parameters the same as before, the optimum saving rate jumps up to 72.5%, which is, again, a high rate of saving. My point in working with the parameter values in my piece was only to show that a figure of 1 for eta reflects scant interest in inequality among people and scant interest in avoiding risk. I had nothing else in mind.

With best wishes.

Partha Dasgupta

I agree with almost all of what Partha Dasgupta says. I agree that eta = 1 involves a judgment that risk is not very important and that inequality between the present and the (presumably richer) future is not something that carries much weight. I share his belief that delta = 0.1% per year and eta = 1 does not generate conclusions that correspond to our moral intuitions, and that eta = 3 or so creates a better match with at least my beliefs about how one should take risks to and inequality across persons into account.

I agree that finger exercises like the one he carried out--the consequences for optimal savings plans of delta =0 .1% per year, eta=1, and r = 4% per year--are very useful, and indeed indispensible if we are to control our models rather than having our models controlling us. And Dasgupta is perfectly correct that in a model with delta = 0.1% per year, eta = 1, and r = 4% per year together imply a savings rate of 97.5% of output. (Indeed, in this model eta=3 produces a savings rate of 25% of net output.) My only quarrel is that once one allows for technological progress the Haig-Simons output concept appropriate for the model economy is not output-understood-as-conventionally-measured-GDP.


The problem I see lies in a perfect storm of interactions: in the assumption of a constant 4% per year rate of return on investment that requires that the underlying production function be of the knife-edge "AK" form, in Partha Dasgupta's use of "GDP" rather than "output," and in the interaction of those two with the fact that most readers are not going to be very careful or thoughtful or well-informed. All these mean that Dasgupta's true statements about the Platonic Forms becoming misleading in the eyes of those who can only see the shadows on the walls of the cave.

For example, go to the Cato Institute's website and you will find opinions attributed to Dasgupta which I think he would not approve of:

Cato-at-Liberty: Dasgupta thinks that Stern's moral admonition to treat generations the same across time is demonstrably ridiculous.... Assume, for instance, that we apply a 0.1% discount rate for future investment and assume a social rate of return on investment of 4% a year.

It is an easy calculation to show that the current generation in that model ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. Should we accept the Review's implied recommendations for this country's overall savings? Of course not. A 97.5% savings rate is so patently absurd a figure that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to impoverish itself for the sake of future generations....

[A]nyone honestly concerned about equity would happily confiscate as much of the wealth from future generations that they could get their hands on...

Jerry Taylor of Cato makes his declaration that Dasgupta thinks "treat[ing] generations the same across time is demonstrably ridiculous" in spite of the fact that Dasgupta says exacty the opposite: "I have little problem with the figure of 0.1% a year the authors have chosen for the rate of pure time/risk-of-extinction discount (delta)." Why? Because Taylor believes that Dasgupta has shown that ""treat[ing] generations the same" entails cutting consumption to 2.5% of GDP not in one particular finger-exercise model but in the real world.

The problem is broader than just Dasgupta's comment. For example, Australian economist John Quiggin notices confusion out there--on the part of people who are by nowise dumb--between market discount rates and pure rates of time preference assumed in the Stern Review:

Crooked Timber: In yet another round of the controversy over discounting in the Stern Report, Megan McArdle refers to Stern's use of "a zero or very-near-zero discount rate."... Bjorn Lomborg refers to the discount rate as "extremely low" and Arnold Kling complains says that it's a below-market rate....

Stern... picks parameters that determine the discount rate... the pure rate of time preference (delta) which Stern sets equal to 0.1[% per year] and the intertemporal elasticity of substitution (eta) which Stern sets equal to 1.... Given eta = 1, the [market] discount rate is equal to the rate of growth of consumption per person plus delta.... A reasonable estimate for the growth rate is 2 per cent, so Stern would have a real discount rate of 2.1 per cent... a discount rate a little above the real [U.S. Treasury long-term] bond rate.

Arguments about discounting are unlikely to be settled.... There's a strong case for using bond rates.... There are also strong arguments against, largely depending on how you adjust for risk. But to refer to the [current long-term] US [Treasury] bond rate as "near-zero" or "extremely low" seems implausible, and to say it's below-market is a contradiction in terms....

[T]hese writers have confused the discount rate with the rate of pure time preference...

Yet they are--without understanding correctly how the benefit-cost analysis works--making strong negative statements about the Stern Review.

If we had Nicholas Stern here, I suspect that he would say that we should all look at, and would say that it is extremely hard to set even semi-realistic parameter values for delta and eta that would would push expected discounted damages from global warming below, say, 4% of total world wealth.

Macro-International-Growth Lunch: Wed Dec 6 2006: U.C. Berkeley Department of Economics: Banerjee, Duflo, and Munshi (2003) "The (Mis)allocation of Capital"

Macro-International-Growth Lunch: Wed Dec 6 2006: U.C. Berkeley Department of Economics

Notes on Abhijit V. Banerjee, Esther Duflo, and Kaivan Munshi (2003) "The (Mis)allocation of Capital," Journal of the European Economic Association 1(2–3), 484–494

How economists use the neoclassical benchmark:

  • At Chicago: Assume that the economy is at the neoclassical benchmark, and demonstrate that whatever exists is, in some subtle sense, constrained Pareto-optimal efficient--except where ham-handed government intervention has caused messes.
  • At Berkeley: Investigate the deviation from the neoclassical benchmark that can be caused by one single but significant market failure, demonstrate that this deviation matches up to some important feature of the real world, and demontrate that a clever, subtle, and strategic government intervention can move us to a situation that is constrained Pareto-optimal.

Banerjee, Duflo, and Munshi set out to hunt down this neoclassical benchmark, and show that the real world is so far from it that the benchmark's utility as a base of operations--in either the Chicago or the Berkeley sense--is... severely limited.

Their claim: capital markets in India simply don't work. Firms employing less than 50 people where the marginal product of capital is on the order of 100% per year can't get additional financing to exploit these opportunities.

And now to the paper: Abhijit V. Banerjee, Esther Duflo, and Kaivan Munshi (2003) "The (Mis)allocation of Capital.: Journal of the European Economic Association 1(2–3), 484–494

Simple implications of the theory of credit markets:

  • A firm is credit constrained if the marginal product of capital in the firm is higher than the rate of interest that firm is paying on its marginal rupee of borrowing.
  • If a firm that is not credit constrained is offered some extra credit at a rate below what it is paying on the market, then the best way to make use of the new loan must be to pay down the firm’s current market borrowing, rather than to invest more.
  • By contrast, a firm that is credit constrained will always expand its investment to some extent.
  • For unconstrained firms, growth in revenue should be slower than the growth in subsidized credit.
  • If we do not see a gap in these growth rates, the firm must be credit constrained.

Priority sector rules in India:

  • All banks in India are required to lend at least 40 percent of their net credit to the “priority sector,” which includes small scale industry (SSI), at an interest rate that is required to be no more than 4 percent above their prime lending rate.
  • In January, 1998, the limit on total investment in plants and machinery for a firm to be eligible for inclusion in the small scale industry category was raised from Rs. 6.5 million to Rs. 30 million. [Rs. 1 = $0.02; GDP/capita = Rs. 40,000 per year]

Data obtained from one of the better-performing Indian public sector banks:

  • From the loan folders maintained by the bank.
  • Data on profit, sales, credit lines and utilization, and interest rates.
  • 253 firms (including 93 newly eligible firms
  • Including 175 firms for which we have data from 1997 to 1999.
  • We can allow small firms and big firms to have different rates of growth
  • The rate of growth to differ from year to year
  • We assume that there would have been no differential changes in the rate of growth of small and large firms in 1998, absent the change in the priority sector regulation.

The change had an impact:

  • Credit limits granted to firms below Rs. 6.5 million in plant in machinery (henceforth, small firms) grew by 11.1 percent during 1997
  • Credit limits granted to firms between Rs. 6.5 million and Rs. 30 million (henceforth, big firms) grew by 5.4 percent.
  • In 1998, after the change in rules, small firms had 7.6 percent growth while the big firms had 11.3 percent growth.
  • By 1999 new equilibrium.

Table 1:


  • Bank credit as the outcome for the firms where there was a change in credit limit: The coefficient of the interaction BIG-POST is 0.24, with a standard error of 0.09.
  • Whether or not a file is brought out for a change in limit has nothing to do with the needs of the firm, but the internal dynamics of the bank.
  • This additional credit in turn led to an increase in sales. The coefficient of the interaction BIG-POST in the sales equation, in the sample where the limit was increased, is 0.21, with a standard error of 0.09 [column (5)].
  • By contrast, in the sample where there was no increase in limit, the interaction BIG-POST is close to zero (0.05) and insignificant [column (8)].
  • The effect on profit is even bigger than that on sales: 0.75, with a standard error of 0.38.
  • The IV estimate of the impact of bank credit on profit is 2.7. This is substantially greater than 1, which suggests that the technology has a strong fixed cost component. We can use this estimate to get a sense of the average increase in profit (net of interest) caused by every rupee in loan. An increase of Rs. 1,000 in the loan corresponds to a 1.04 percent increase. Using the coefficient of loans on profits, an increase of Rs. 1,000 in lending therefore causes a 2.7 percent increase in profit. At the mean profit (which is Rs. 37,000), this would correspond to an increase in profit (net of interest) of Rs. 999. Consistent with firms being credit constrained, this suggests a gap between the marginal product of capital and the interest rate of about 100 percent.
  • This data does not tell us anything about the efficiency of allocation of capital across firms—it remains possible that capital does have the same marginal product in all its uses.

Tirupur is a smallish town in Southern India which dominates the Indian knitted garment industry:

  • Through a good part of the 1990s the industry in Tirupur was growing at 50 percent or more.
  • The industry was traditionally dominated by a single local caste group, the Gounders.
  • Our basic strategy is to compare the investment behavior of Outsiders with that of the Gounders.
  • Gounders are a small, wealthy, agriculturist community from the area around Tirupur who have moved into the local knitted garment industry over the last three decades because there is not much scope for more investment in agriculture. They have virtually no industrial presence outside Tirupur. Going into local knitted garment business, or helping a family member or friend get set up in the business, is therefore one of the best ways to use their considerable wealth.
  • Outsiders have few strong ties in Tirupur, being from hundreds and even thousands of miles away. Moreover, they are from communities that have many alternative opportunities for investing their money. We would expect the Outsiders not to have the kind of capital access enjoyed by the Gounders.

Data: A survey of 147 exporters in 1995:

  • Gounders own about twice as much capital and maintain capital-production and capital-export ratios 1.5 to 2.5 times as high as the Outsiders
  • Columns (2) and (3) tell us that Gounders start with a higher capital-output ratio, and maintain that advantage at every level of experience.
  • Do Gounders simply simply make better use of capital? The data on exports and production clearly rejects the possibility that the Gounders are more productive in general.
  • Outsiders start out producing and exporting less but grow faster and overtake the Gounders by the time they have been in business about five years. Average output for Outsiders who have six years or more of experience is significantly higher than that of the Gounders.

Table 2:


  • Capital markets in India are very far from the neoclassical ideal.
  • The gap between the marginal product of capital and the market interest rate seems to be at least 70 percentage points.
  • The gap between the marginal product of capital and the rate paid to savers is even larger.
  • Investors who on average are less productive may invest as much as three times more than their more productive counterparts.
  • All this is not necessarily surprising given that the legal system is slow, inefficient and sometimes corrupt, and defaulters usually get off lightly.
  • But it does raise questions about the usefulness of the neoclassicalbenchmark.

Disconnect Between the Fed and the Markets

The markets expect the Fed to cut interest rates over the next year. The Fed doesn't. Greg Ip reports:

Fed Is Hampered By Past in Effort To Sound Warning - Federal Reserve officials -- unlike bond investors -- think the economy is a lot sounder today than at the end of 2000 and in early 2001, when the Fed abruptly reversed course and began a string of interest-rate cuts. Yet Fed Chairman Ben Bernanke's effort to convey the message that today's conditions are different is hampered by the Fed's lack of candor back in 2000.

Fed officials, who have universally voiced concerns about inflation, are expected to keep short-term interest rates steady at 5.25% at their policy meeting next Tuesday. But bond markets have priced in a small chance of a rate cut next week and three one-quarter percentage-point cuts over the next 12 months.

Markets anticipate those cuts in part because they see parallels to 2000. A technology-stock and investment bust began to unfold in the summer of that year, yet in November the Fed still said its principal concern was inflation, not economic growth. Seven weeks later, with stock prices tumbling and businesses canceling investment plans, the Fed made the first of 13 interest-rate cuts.

Like stock prices then, housing prices today are turning down after a long run-up. But there is little sign the decline has spilled over into the rest of the economy. Stock prices are up, not down. Officials acknowledge recent data have been weak, especially for manufacturing and commercial construction, and they are expected to closely scrutinize the November jobs report, to be released Friday.

The weak data, however, haven't been corroborated by anecdotal evidence from the Fed's extensive business contacts. The Fed's recent "beige book" roundup of regional business conditions found "moderate growth" and "tight" labor markets.

Fed officials thus appear content with a forecast of moderate growth over the next few quarters, then a rebound in mid-2007. "I don't think that the data we have seen are out of line" with that forecast, Federal Reserve Bank of Chicago President Michael Moskow said Monday on

The Fed has viewed the housing pullback as the principal threat to growth. The slump prompted Fed Vice Chairman Donald Kohn to say two months ago that the risks to growth were "skewed a bit to the downside."

Since then, as the decline in housing sales has moderated and shown little sign of damping consumer spending, officials' concerns have eased. Last week Mr. Bernanke indicated he saw the risks to growth as balanced.

In late 2000, the Fed's business contacts were getting worried, and the stock market was crumpling as profit warnings proliferated. "Everything was pointing up and, all of a sudden, everything started pointing down," recalls Edward Gramlich, a Fed governor at the time. Today, "the key thing is whether the weakness in housing -- and now autos -- feeds over into consumption at large, and as I understand it, it really hasn't"...

The Winner of the Stupidest Men Alive Contest

The Stupidest Men Alive contest is over, with one and only one winner. Others just cannot compete--no way, no how.

There is one and only one man ideally situated to be a counselor to America's president. One and only one man who (a) has been president, (b) is still sharp as a tack, (c) wishes George W. Bush well, and (d) knows what it is like to sit in the Oval Office.

Does George W. Bush ask for his advice and counsel? No.

Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!! Stupid. Stupid. STUPID. STUPID!! STUPID!!!!!

Every Republican who has not told this clown that he should resign should be profoundly ashamed of him or herself. Every Republican. Every non-Republican too:

Dan Froomkin - Bush Denies Reaching Out to Dad - Even as Washington's punditocracy relishes the storyline of the elder-statesman father riding to the hapless son's rescue, President Bush insisted yesterday that he doesn't talk shop with his dad -- and certainly doesn't ask for his advice.... Here's the transcript and the video.... [W]hen Hume brought up the issue of his father's influence, Bush responded with a forced grin, a clenched fist and a somewhat petulant response: "I'm the commander in chief," he said. And Bush's explanation for why he doesn't talk policy with his dad simply doesn't hold water. "You know, I love my dad," Bush said. "But he understands what I know, that the level of information I have relative to the level of information most other people have, including himself, is significant."

Oh, please. That's obviously not the real reason.

So here are two more-likely possibilities: Either Bush does talk to his dad and doesn't want people to know; or he truly has no interest in what his dad thinks.

The latter still strikes me as the most likely. Bush, after all, remains the son whose actions can be seen in large part as a reaction to his father -- rather than an homage. As Bush biographer Bill Sammon wrote in 2004: "President Bush is resolved not to repeat what he thinks were the two fundamental blunders of his father's one-term presidency: abandoning Iraq and failing to vanquish the Democrats. "In one of several exclusive interviews with the Washington Times, Mr. Bush said his father had 'cut and run early' from Iraq in 1991." But now, with the younger Bush looking so reckless by comparison, the elder Bush -- according to Bob Woodward-- is "in agony, anguished, tormented by the war in Iraq and its aftermath."

The last time Bush spoke publicly about his father was just before the election. As Reuters reported, Bush "gently admonished his father for saying he hates to think what life will be like for his son if the Democrats win control of Congress in the Nov. 7 election. "'He shouldn't be speculating like this, because -- he should have called me ahead of time and I'd tell him they're not going to [win],' a smiling Bush said during an interview broadcast yesterday on the ABC program 'This Week.'" Of course, the elder Bush was right about that one, too....

Here is the relevant excerpt from the Fox News interview, with a few stage directions:

Hume: "The presence of Baker on this commission and the important role he plays, the emergence now of Bob Gates as the Rumsfeld successor, has given rise to a widespread feeling that the men who advised your father are now emerging as critical to you and that your father's influence is all over this."

Bush: "Yeah." [Bush grins, but his raised left fist is clenched tightly.]

Hume: "What do you say to that?"

Bush: "I say that [pause, exasperated shrug] you know, I'm the commander in chief. I make decisions based upon what I think is best to achieve our objectives, and that, uh --" [shakes his head]

Hume: "Was your father involved in the decision to name Gates?"

Bush: [Eyebrows shoot up defensively] "I asked him what kind of man Gates was with him, because of course he knows him."

Hume: "Did he know ahead of time? Ahead of the day? That you were gonna --"

Bush: "No."

Hume: "He didn't."

Bush: "No."

Hume: "A lot of people have been curious -- and I've asked you about this before and the answer fascinates me, so I'll ask it again. The universal expectation would be, your father's a former president, you and your brothers and your sister Doro all adore your father, everybody knows that, one would imagine you would consult him constantly about matters of policy. Is that the case?

Bush: "No. You know, I love my dad. But he understands what I know -- that the level of information I have relative to the level of information most other people have, including himself, is significant and that he trusts me to make decisions.

"I love to talk to my Dad about things between a father and a son, not policy. I get plenty of policy time. I'm interested in talking to a guy I love. And I get inspiration from him as a father, you know.

"Washington can be a tough town at times, and there's nothing better than hearing a loving voice at the end of the phone call occasionally, and so I check in with mother and dad, you know, I would say once every two weeks. I love surprising them with an early morning phone call and saying, you know, how ya doing?

"And of course, they're worried about their son. They're worried about -- they're paying too much attention to the newspapers, I guess."

Bush's "I'm the commander in chief" response is a little reminiscent of his "I'm the decider" riff from back in April.

Both sound a bit defensive. And it's worth noting that the latter comment came about in the midst of what turned out to be a hollow assurance.

"I hear the voices, and I read the front page, and I know the speculation," Bush said at the time. "But I'm the decider, and I decide what is best. And what's best is for Don Rumsfeld to remain as the secretary of defense."

The other memorable exchange in the interview came when Bush talked about his state of mind. He is apparently neither pained nor burdened by the war in Iraq -- or anything else, for that matter -- thanks to all the people praying for him.

Hume: "I've just spent some time in the company of people who were for you, who are worried about you, just as you described your parents are. They think that your presidency has run aground on the shoals of Iraq and that you must be -- they feel almost sorry for you. What do you say to those people?"

Bush: "Yeah, I don't think people are -- at least the ones I run into -- look, I had a bunch of our buddies from Texas up here this weekend, and they're kind of -- they look at you, and go, man, how come you're still standing? It's not so much the presidency on the shoals because of difficult decisions I made; it's more, the weightiness of this thing must be impossible for anybody to bear. And I tell them it's just not the case, that I'm inspired by doing this job. . . .

"I also remind them, Brit, that Laura and I are sustained by the prayers of millions of people. That's hard for some to, you know, I guess, chew on."

Hume: "You sense that."

Bush: "Absolutely."

Hume: "I know they tell you that, when you see them out on the hustings. But do you sense that?"

Bush: "I feel it."

Hume: "You feel it."

Bush: "Yeah. Because the load is not heavy, I guess is the best way to describe it. Look, somebody said to me, prove it. I said you can't prove it. All I can tell you is I feel it. And it's a remarkable country when millions pray for me and Laura. So therefore I'm able to say to people, that this is a joyful experience, not a painful experience. And yeah it's tough, but that's okay. It's tough times."

Hume's One Tough Question

Hume: "You have said on a number of occasions that your view of the shape and mission of U.S. forces day by day in Iraq, week by week, is based on what General Abizaid and, more specifically, General Casey say, that this has been kind of a Casey and Abizaid approach. Is that a fair assessment?"

Bush: "I have said that the force size will depend upon conditions on the ground and upon the recommendations of our commanders on the ground, absolutely."

Hume: "Is it fair to say, then, that the approach in Iraq has been more a reflection of what Casey and Abizaid wanted than of anybody else over there? Or anybody else in the military?"

Bush: "I think from the military tactics that they are the chain of command through Rumsfeld to me."

Hume: "Right."

Bush: "Now they listen to all kinds of people on the ground and they are very thoughtful, decent, honorable men, who understand that -- what the mission is and understand that it is their obligation to design the tactics to achieve the mission."

Hume: "It is -- it does the raise the question though, Mr. President, if they're the guys who've been designing and trying to execute the mission and you're impatient with the progress, why is it that Rumsfeld's going and they're staying?"

Bush: "Well, they also are impatient with the progress, just like Secretary Rumsfeld is. And he came to the same conclusion that I came to, that it was time to get fresh eyes in the Pentagon on the issue. And I strongly support his past tenure and I appreciate his service to the country."

That answer, of course, is completely nonresponsive.

Igor! We Need to Recalibrate the Stupid-O-Meter!

Yes, our stupid-o-meter has been blown out by a gigantic stupidomagnetic pulse. And Ann Althouse is now the winner-for-life of the Stupidest Woman Alive contest:

Whiskey Fire: Ann Althouse always has the capacity to completely and utterly astound me. There is always another layer of just plain nuts. The pictures of Jose Padilla being led to the dentist in leg shackles and blackout goggles have provoked outrage and disgust and bafflement. Why the goggles? What's the point? Althouse has an answer:

Perhaps there is a fear that he will communicate in code by blinking.

And upon being informed that this is, in fact, completely absurd, she becomes characteristically petulant:

I'm not saying Padilla deserves to be treated the way he has over the years, but I am responding to the assertion that there is absolutely no conceivable reason for blindfolding him. Plainly, I have refuted that.

Plainly. She was blinking when she typed it.

I fear there is not snark enough in all the world for Althouse.

Fear not. When the One Who Is made Althouse, she also made Altmouse!

Daniel Glover Shreds His Reputation Further

Yep, one last look at Beltway Blogroll: A Follow-Up Piece On Paid Bloggers.

To recap: Danny Glover said that the point of his Sunday New York Times article was not that: "anyone... is 'corrupt'.... I don't believe that. Candidates have the right to pay for Internet advice, blogging, etc., and bloggers have a right to be paid..." Never mind that I, and all six people I talked to on Sunday, thought that the point of Glover's article and chart was precisely that Glover thought the webloggers he named were trading favorable mentions for cash.

Danny Glover said that the point of his article was, instead, that: "it's interesting that some bloggers made a name for themselves by fighting the establishment and billing themselves as revolutionaries but at the same time are willing to work for campaigns..."

I then asked: "Which of twelve webloggers you named yesterday do you believe billed themselves as revolutionaries who disdained to work for candidates?"

Danny Glover answered: "Jerome Armstrong, Peter Daou, Tim Tagaris and Scott Shields certainly see themselves as revolutionaries, and I suspect most everyone on the list does."

So we have by Glover's count eight who have not billed themselves as revoutionaries (I would say ten)--if they had, wouldn't Glover know? Eight added to pad out a list that would otherwise have been an anemic four names long.

Saddest thing I've seen in a month.

Econ 101b: Fall 2006: Final Exam Information

Final exam to be given in 534 Davis, at 12:30 PM on Wednesday, December 13.

"Where is Davis?" you ask. I have no idea. Davis used to be where the gigantic hole now on Hearst is.

Course: ECONOMICS 101B P 001 LEC
Course Title: Economic Theory--Macro
Date/Time: WEDNESDAY, DECEMBER 13, 2006 1230-330P
Location: 534 DAVIS
Instructor: DELONG, J B
Course Control Number: 22534
Final Exam Group: 5

UPDATE: Ah. They only tore down half of Davis. What I thought was the back half of Bechtel is actually the front half of Davis.

And here is the practice final exam:

I Am on Chris Lydon's Open Source Radio, December 4, 2006

Here it is:

Chris Lydon Open Source Radio: Barney Frank's Grand Bargain

Barney Frank wants to make a deal... a Congressionally-mediated "Grand Bargain" between economic populists and free traders. The populists get federal subsidies for health care, an increase in the minimum wage, more freedom to create unions and better access to college loans. The free traders get, well, free trade.

Health care and free trade have long been debated as unrelated subjects, but like Lyndon Johnson... Frank is attempting the impossible. He accepts that tariff-free borders are crucial to long-term economic growth, and that long-term economic growth is, in fact, good for everyone.

At the same time, he points out that economic dislocation is particularly hard on the ones being dislocated, and that perhaps a part of what voted the Democrats in this year is a general sense that even if the economy is doing well right now, we the people are not.

Is such a bargain even possible? Who has to give up what? Is there a such thing as a win-win in American politics?

Brad Setser Sends Us to the Economist on the Falling Dollar

Brad Setser praises the Economist on the dollar:

Roubini Global Economics (RGE) Monitor: Good reading on the dollar’s recent move: I have on occasion been critical of the Economist’s coverage, particularly its emphasis on Chinese consumption growth rather than Chinese export growth. But I should also give credit where credit is due. I thought their leader on the dollar was spot on.

Among other things, the leader makes three key points:

Europe has done a lot better recently than most Americans think – think of a US style housing boom that has supported domestic demand combined with a strong export sector. Germany’s rust belt (a.k.a export machine) is doing a lot better than Ohio, even with a strong euro.

The dollar isn’t that weak. At least not yet. There is a tendency to equate the dollar with the dollar/ euro. And no doubt the dollar/ euro matters greatly – for tourists, for the value of US investment abroad and for United States competitiveness in many third party markets. But the dollar has also moved a lot more against the euro than against other currencies. On a broad trade-weighted basis, the dollar remains well above its levels in the late 80s/ early 1990s. See General glut, or compare the major currency index with the other trading partners index. That suggests it needs to fall further.

Countries with lots of dollar reserves may not want to see those dollar reserves fall in value, but most countries with large dollar reserves can only protect the value of their existing reserves by continuing to buy more dollars. That only adds to their exposure to future falls in the dollar (both to falls in the dollar/ euro and to falls in the dollar against their own currencies). Call it the Amaranth strategy.

The Economist hints that some central banks are likely to conclude that they are better off if they don't keep adding to the dollar holdings. I have some sympathy for that argument – Nouriel and I made it strongly two years ago. Central banks have gone on to add $900b (by my estimate) to their dollar reserves over the last two years. Having been premature once, I am a bit gun shy – I don’t (yet) see strong evidence that there has been much of a change in central banks willingness to accumulate reserves. More on that in a bit.

I also wanted to laud Steven Weisman’s coverage in the New York Times, which got, I think, the United States dollar policy more or less right -- though the headline should probably say that a weak dollar rather that volatile dollar doesn't scare to Washington. The US doesn’t just have a strong dollar policy. It has a strong dollar policy and a please-intervene-less-to-keep-the-dollar strong policy. Call it a strong dollar and an-even-stronger RMB policy...

But he is not happy with Robert Samuelson:

That is why I was disappointed to see Robert Samuelson trot out the old “slow growth in the rest of the world” explanation for the expanding US trade deficit. “Faster economic growth in the United States than in many of our major trading partners has stunted our exports and increased our imports.” That explanation just doesn’t cut it right now. Global growth has been very strong since 2004 (look at the IMF’s WEO data). In 2004, you could argue that Europe was lagging. Not so any more. Right now both global and European growth are strong. That is one reason why US export growth has been quite strong since 2004 as well.

So why hasn’t the trade deficit fallen? I suspect we may need to rethink how strong global growth influences the US trade deficit in a world where there isn’t much slack in the oil market. The US imports a lot more of its energy than it has in the past. And with limited spare capacity in the global oil market, strong growth means higher oil prices and a higher oil import bill along with higher exports...

Department of "Huh?"

I must be slow and stupid. I don't understand in what sense this is a "hedge fund replication tool": / Home UK / UK - Goldman sets up hedge fund clone: By Steve Johnson: Goldman Sachs has become the first bank to create a hedge fund replication tool in a move that could lead to a shake-up of the $1,300bn hedge fund industry. The platform will greatly undercut the notoriously high fees of the hedge fund sector. Those investing through a fund of funds can end up paying annual charges of 4-7 per cent, with up to 50 per cent of their returns eaten up by fees. Goldman will charge a flat 1 per cent.

Goldman's Absolute Return Tracker index (Art), is set to be among the first of a flood of hedge fund cloning products likely to be launched in a revolution being compared with the arrival of index trackers in the mutual fund world a generation ago. "There is a lot of dead wood in the industry -- people who should not be running hedge funds," said Harry Kat, professor of risk management at London's Cass Business School, who has just launched his own hedge fund replication tool. "A lot of them will leave the business, because people are smartening up. Index replication is going to become as important as it is in traditional long-only investment, with 30-40 per cent of the market."

Replication strategies are based on academic research that suggests hedge fund performance is largely driven by movements in underlying markets, such as equity, bond and commodity prices, rather than the intrinsic skill of managers. Goldman has spent two years developing the algorithm that underpins its platform. The performance characteristics of thousands of hedge funds will be fed into the system monthly and Art is designed to decompose these data and calculate the aggregate position of the hedge fund universe. This position can then be replicated, potentially allowing Goldman to generate hedge fund performance at a fraction of the cost.

Clones such as Art avoid the negative selection bias that bedevils existing investible hedge fund indices and funds of funds, due to the fact that few of the better hedge funds are open to new investment. It will be far more liquid, with trading available on a daily basis. "This may be ideal for any large institution that has been looking at hedge funds but doesn't like the fact that it takes six months to put money [in] and to take it out again," said Edgar Senior, executive director in Goldman's fund derivatives structuring team.

Ummm... I was always taught that a hedge fund was something that tried to have a zero beta--hence "hedged"--and that tried hard to buy things that were undervalued and sell things with approximately the same risk characteristics that were overvalued, and hence produce greater-than-bond returns with bond-level risks.

I don't see why any good reason why some varying linear combination of stock, bond, and commodity returns would be worth a 1% per year fee. Of course, I don't see any good reason why the average hedge fund out there would be worth paying 2-and-20% to its managers. And I don't see why anybody back in 1929 held any shares of the Goldman Sachs Trading Corporation, which held a controlling interest in the leveraged Shenandoah Corporation, which held a controlling interest in the leveraged Blue Ridge Corporation, which held--get this--closed-end mutual funds that kept their investments private.

To celebrate, let's buy some stock certificates for the Blue Ridge Corporation (q.v. J.K. Galbraith, The Great Crash)

A +$400 Billion Week

Pierre-Olivier Gourinchas guesses that last week the U.S.'s net foreign asset position improved by $400 billion. Americans' assets overseas, you see, are primarily denominated in local currencies or are real assets. Foreigners' assets here, you see, are primarily denominated in dollars. The weakening of the dollar thus raised Americans' assets minus liabilities by about $400 billion.

Nice work if you can get it. Exorbitant privilege.

Why Oh Why Can't We Have a Better Press Corps? (Omnibus New York Times/Danny Glover/National Journal Issue)

THIRD UPDATE: We read Danny Glover of the National Journal, writing to Micah Sifry in semi-apology-exculpation mode with respect to his much-derided piece, "New on the Web: Politics as Usual", in the New York Times. Glover writes:

[Y]ou are being unfair in characterizing my piece... as an "attack" piece.... My article neither states nor implies that anyone... is 'corrupt'.... I don't believe that. Candidates have the right to pay for Internet advice, blogging, etc., and bloggers have a right to be paid....

I do think it's interesting that some bloggers made a name for themselves by fighting the establishment and billing themselves as revolutionaries but at the same time are willing to work for campaigns...

And so we call Danny Glover at the National Journal:

Brad DeLong: My name is Brad DeLong, calling from Berkeley. Which of twelve webloggers you named yesterday do you believe billed themselves as revolutionaries who disdained to work for candidates?

Danny Glover: I'm not going to discuss that. I'm not to discuss that over the telephone.

Brad DeLong: So you won't tell me which of the twelve you named yesterday billed themselves as revolutionaries who disdained to work for candidates?

Danny Glover: I'm happy to discuss that over the internet. I'm not going to discuss that over the telephone. I'm on deadline. I have to get back to work.

Yes, they trash their reputations yet again.

Danny Glover partially blames the New York Times's editors for the fiasco: "[The] section on disclosure... was dropped.... The nuanced points I made about disclosure got lost in the process.... Bloggers in general have handled the disclosure issue very well..." Avoid the passive voice, Danny!

Glover hastens to reassure his readers that in spite of what virtually everybody I have talked to about his article thinks, he "neither states nor implies that anyone, candidates or bloggers, is 'corrupt'.... Candidates have the right to pay for Internet advice, blogging, etc., and bloggers have a right to be paid for that work..."

Mendacity or incompetence? Micah Sifry reports, you decide. My guess is mendacity on the part of the New York Times's editors, and incompetence on the part of Danny Glover:

Micah Sifry: Glover's Low Blow on Bloggers | Personal Democracy Forum: [T]oday's New York Times Week in Review, which has a giant 3/4 page charticle by Danny Glover of National Journal titled "New on the Web: Politics as Usual."... Glover sets up a straw man--that all political bloggers are contemptuous of the political establishment, outsiders, "revolutionary" even--and then... [produces] a list of bloggers who went to work in 2006 for political campaigns: Jerome Armstrong, Abraham Chernilla, Peter Daou, Jule Fanselow, Lowell Feld, Jon Henke, Aldon Hynes, Patrick Hynes, Scott Shields, Aaron Silverstein, David Sirota, Tim Tagaris and Jesse Taylor.

[Glover] goes further, essentially arguing that these political bloggers are for sale.... Hence the "politics as usual" as the subtitle.... First problem: Like a lot of other commentators, Glover treats political bloggers as a monolith... all filled with disdain and contempt for the political establishment. "You might think that with the kind of rhetoric bloggers regularly muster against politicians, they would never work for them," he writes, setting up his straw man.

But this is patently silly. Peter Daou... worked for a year on the Kerry campaign. How anti-establishment is that? Tim Tagaris... did a stint at the DNC. Republican blogger Patrick Hynes... is a senior account executive with a Republican consulting firm.... Second problem: Glover makes a big deal over the fact that "Few of these bloggers shut down their 'independent' sites after signing on with campaigns, and while most disclosed their campaign ties on their blogs, some--like Patrick Hynes of Ankle Biting Pundits--did so only after being criticized by fellow bloggers." Note those quote marks around the word "independent."

That's the "for sale" charge, and unless Glover can cite more evidence... he's... smearing... good names.... I've written him.... Glover replies....

The... chart... section on disclosure... was dropped... nuanced points I made about disclosure got lost in the process....

Michael Brodkorb of Minnesota Democrats Exposed was attacked by liberal bloggers this year for not disclosing his work for campaigns.... I mentioned Brodkorb in my initial article.... He was dropped from the Times chart....

Bloggers in general have handled the disclosure issue very well and I acknowledged as much by saying "most disclosed their campaign ties on their blogs."...

While I never said all political bloggers are self-styled revolutionaries, that clearly is how the most prominent bloggers, their proteges and their readers see themselves. I suppose you could make the argument that Peter Daou doesn't belong in that bunch....

I also would add that you are being unfair in characterizing my piece for the Times as an "attack" piece.... My article neither states nor implies that anyone, candidates or bloggers, is 'corrupt' because of ties between the two. I don't believe that. Candidates have the right to pay for Internet advice, blogging, etc., and bloggers have a right to be paid for that work -- or to do it on a volunteer basis, if they so choose.

I do think it's interesting that some bloggers made a name for themselves by fighting the establishment and billing themselves as revolutionaries but at the same time are willing to work for campaigns....

[T]wo comments on [Glover's] email. First, it's interesting that he admits that the only other blogger he knows of who failed to disclose his political campaign ties was a Republican, Michael Brodkorb. Too bad that his Times oped leaves the reader with the sense that some unknown number of these mostly Democratic bloggers listed were hiding something.

Second, I guess it's clear that Danny thinks he's discovered something big--revolutionary bloggers going to work for the Man--but... this is a straw man.... What is a big deal is the implication that this makes them corrupt. Danny says that he doesn't believe that. Fine. Take a look at the graphics.... We've got a line that goes from "blogger" to "candidate" to "payments" to "excerpt" (i.e. the favorable writing of said blogger, with no clarity about whether it was on the candidate's blog or on their own blog, and if proper disclosure was made). And at the end of that line, in the top right corner of the page where you can't miss it, is a big dollar sign.

This is unfair, and it's too bad.

UPDATE: Lots more good commentary on this here on Pandagon (who points out that Jesse Taylor, one of the bloggers named by Glover, had given up ownership of that blog before he joined Ted Strickland's campaign), on (by one of my favorite grad students, Xpatriated Texan, who defends blogger Scott Shields from Glover's implication that he had failed to disclose his work for the Menendez campaign), and on Steve Gilliard's News Blog.

UPDATE: Daniel Glover writes that Micah Sifry's piece is "a thoughtful response.... Though I disagree with Sifry, I commend his entry as the best rebuttal to date I've seen to my Times piece." Glover does not say what he disagrees with in Sifry's analysis, or why.

SECOND UPDATE: Glover says at that the only comments he has "deleted have been laced with vulgarities. We have had problems in the past with Moveable Type rejecting comments (including some of my own) for reasons that we've never been able to figure out." Between 9 and 10 AM EST 7 comements were added to Glover's update article. Between 10 and 11 9 comments were added. Between 11 and 12 EST 0 comments have been added.

Three comments come through between 12 and 1, out of a much greater number that have been posted...

Walter Pincus Is Shrill

Walter Pincus today is a shrill critic both of the malevolence, mendacity, incompetence, and disconnection from reality of George W. Bush and his administration and of the faceless editors and the reporters--Jim Vandehei, Juliet Eilperin, and Dana Milbank--of his own newspaper, the Washington Post:

None of the reasons [Barbara Lee] gave to justify her concerns, nor those voiced by other Democratic opponents, was reported in the two Post stories about passage of the resolution that day.

Here is Pincus:

Democrats Who Opposed War Move Into Key Positions - New Committee Chairmen Had Warned of Postwar Disorder. By Walter Pincus. Monday, December 4, 2006; A04: Although given little public credit at the time, or since, many of the 126 House Democrats who spoke out and voted against the October 2002 resolution that gave President Bush authority to wage war against Iraq have turned out to be correct in their warnings about the problems a war would create.... Rep. John M. Spratt Jr. (S.C.), a senior member of the Armed Services Committee, was one of several Democrats who predicted during the House floor debate that "the outcome after the conflict is actually going to be the hardest part, and it is far less certain."... Spratt recently looked back at his [proposed amendment], which would have required Bush to come back to Congress before launching an attack. It was defeated 270 to 158.... The incoming Armed Services chairman, Rep. Ike Skelton (D-Mo.), spoke in support of Spratt's amendment, stressing the need for "a plan for rebuilding of the Iraqi government and society, if the worst comes to pass and armed conflict is necessary." Skelton had written Bush a month earlier, after a White House meeting, to say that "I have no doubt that our military would decisively defeat Iraq's forces and remove Saddam. But like the proverbial dog chasing the car down the road, we must consider what we would do after we caught it."...

Rep. David R. Obey (Wis.)... recalled recently that an amendment by Rep. Barbara T. Lee (D-Calif.) that would have delayed taking action until inspectors from the United Nations completed their work "made sense, but there was no prayer it would pass." It got 72 votes. Obey said Spratt's amendment was the only approach "that could gather critical mass, and that's what most of us in the caucus settled on." The number of House Democrats who supported Spratt "was a remarkable achievement."...

Lee also raised questions in the floor debate that remain unanswered. "What is our objective here," she asked four years ago, "regime change or elimination of weapons of mass destruction?"... Rep. Tammy Baldwin (Wis.)... talked on the House floor about what turned out to be the real issues in Iraq. She spoke of the "postwar challenges," saying that "there is no history of democratic government in Iraq," that its "economy and infrastructure is in ruins after years of war and sanctions" and that rebuilding would take "a great deal of money." Baldwin four years ago asked questions that are being widely considered today: "Are we prepared to keep 100,000 or more troops in Iraq to maintain stability there? If we don't, will a new regime emerge? If we don't, will Iran become the dominant power in the Middle East?... If we don't, will Islamic fundamentalists take over Iraq?"...

The day after the House vote, The Washington Post recorded that 126 House Democrats voted against the final resolution. None was quoted giving a reason for his or her vote except for Rep. Joe Baca (Calif.), who said a military briefing had disclosed that U.S. soldiers did not have adequate protection against biological weapons....

Lee was described as giving a "fiery denunciation" of the administration's "rush to war," with only 14 colleagues in the House chamber to hear her. None of the reasons she gave to justify her concerns, nor those voiced by other Democratic opponents, was reported in the two Post stories about passage of the resolution that day.

A Perfect Space-Opera Story

Let me say that I have never been able to get into John Wright's longer works. But his short story, "The Guest Law" is absolutely perfect--a perfect variation on "The Masque of the Red Death."


The oathtaking concluded with Captain Ereshkigal saying: "...and if I am forsworn, let devils and ghosts consume me in Gaia's Wasteland, in God's Hell, and may I suffer the vengeance of the Machines of Earth."

"Exactly so," said Captain Descender, smiling.

German Vocabulary Words

Selected German vocabulary words from the sixteen-year-old:

Bibliothekar -- librarian
wiederholen -- to repeat
Gerechtigkeit -- justice
Gesetz -- law
Geheimnis -- secret
ehrlich -- honest
Wahrheit -- truth
kontrovers -- controversial
Schein -- illusion
Eiche -- oak
kuenstlich -- artificial
Vergangenheitsbewaeltigung -- overcoming the past

They are reading Das schreckliche Maedchen...

A Stupidest Men Alive Nomination for National Security Advisor Stephen Hadley

The spirit of Groucho Marx writes:

Whatever It Is, I'm Against It: Cut and run is not his cup of tea: Hadley blamed the current dismal security situation on Saddam Hussein's army for losing to us so quickly:

You know, Tim, people forget that, that we had hoped to have 150,000 to 200,000 Iraqi army forces to help in the security proposition, and those forces melted away at the close of the war.

Well that was just plain naughty of them. Now, even ignoring that Bremer dissolved the unmelted parts of the Iraqi army, is Hadley really suggesting that the plan was to defeat the Iraqi army and then the very next day put it to work under our command?

This Week in Spencer Ackerman Weekly...

Spencer Ackerman reads the Weekly Standard's Giant Self-Parody Issue. Of course, every edition of the Weekly Standard is a Gigantic Self-Parody Issue. Here we have a lament about the betrayal of George W. Bush, that Little Nell of Presidents, by that Snidely Whiplash of Defense Secretaries, Donald Rumsfeld:

toohotfortnr: I didn't know what to make of the Rumsfeld memo on Iraq until I read Daniel McKivergan's post. Here McKivergan spits hot fire:

If Rumsfeld didn't agree with the "clear, hold and build" strategy, fine. He should have stepped aside and handed over the keys to the Pentagon to someone who supported the new strategy....

For years, Rumsfeld pursued his own agenda in Iraq. He denied things were getting worse. He ignored calls for more troops and dismissed those critical of his conduct of the war. Rumsfeld now suggests that the US "go minimalist" in Iraq. Unfortunately for the president, his defense secretary has followed a "minimalist" approach in Iraq since March 2003. And here we are...

And now, let us all join Spencer Ackerman in chorus:

If only the czar knew!

For six years, Bush had no idea that his Defense Secretary was an agent of internal subversion!...

McKivergan for SecDef!

Annals of Game Theory: Deterrence, Signaling, and Idiocy

The two correct and useful applications of game theory to strategy that I know I learned from Nena and from Daniel Davies:

Daniel Davies: If a given real-world course of action appears to have nothing going for it other than a game-theoretic or strategic justification, it’s almost certainly a bad idea. Thus it is with that bastard child of deterrence, “credibility”....

The idea is that the war is costing huge amounts of money and lives with no real prospect of success and a distinct danger that it is making things much worse. However, to do the logical thing would send the signal to our enemies that we will give up if fought to a pointless bloody standstill. Therefore, for strategic reasons, we must redouble our efforts, in order to send the signal to our enemies that we will fight implacably and mindlessly in any battle we happen to get into, forever, in order to dissuade them from attacking us in the first place. It’s got the kind of combination of “counter-intuitive” thinking and political convenience that always appeals to the armchair Machiavelli, as well as to the kind of person who thinks it’s witty to describe things as “Economics 101.”...

What’s it like as a piece of game-theoretic reasoning?

Lousy. It is certainly true that one of the benefits of doing something stupid is that it... [would maintain] your reputation as an idiot. However, is the reputation of an idiot really worth having?... [N]o. If... being [thought] a belligerent idiot... was worth [it]... then everyone would want to get that reputation... [and] simply acting like an idiot [wouldn't] mean that you were one, in which case it would be impossible to establish a reputation as an idiot....

The point here is that... in game theory... a signal has to be a costly signal... a reputation in deterrence theory is something that is worth having, but not worth getting. People who use the word “signal”... don’t... realise that they are explicitly admitting that the costs... are greater than the benefits....

[Thus] it is very difficult for a democracy to establish this kind of credibility.... [A]lthough leaders are often idiots, democratic polities rarely are. It is very hard for a democratically elected leader to credibly commit to a policy of stupidity, because everyone else knows that it is highly likely that the electorate will not support it. I hasten to add that to take this obvious fact and turn it into a Dolchstosslegende, or to bemoan the lack of national vigour in the manner of Victor Davis Hanson is to get the analysis back to front. It is a good thing about democracies that they don’t in general do stupid things....

Furthermore... delivery has to be consistent with the brand; you can’t tell people to ignore part of your message. If it were true that by sticking it out past the bitter end, we were signalling that we were bitter-enders, then what other messages might we have been sending out over the last few years? In particular, what message does our behaviour since 2003 convey on such important topics as: whether or not we want to fight a war against the Islamic ummah? Or whether the best way to protect yourself against us invading you is to get nuclear weapons? Or whether we are reliable allies? Whether our public statements to the United Nations can be trusted? When you start thinking in these terms, you start really worrying about the reputation that we are actually getting.

Why Oh Why Can't We Have a Better Press Corps? (New York Times Edition)

Worst article on Social Security ever: M.P. Dunleavey, "Basic Instincts: Plan to Retire but Leave Out Social Security," New York Times (December 2, 2006).

For quite a while now I have found it to be the case for the Washington Post that whatever is new to me in it is probably not true, and what's true in it is stuff I already knew. The New York Times appears to be starting down the same road.

Curb Your Enthusiasm, Boys and Girls! (Why Oh Why Can't We Have a Better Press Corps? Economist Edition)

Matthew Yglesias peeks over the shoulder of Kevin Drum as he watches Jonathan Singer read the Economist's Lexington column. The column insults our intelligence. Matthew nails it, and calls bulls---:

Matthew Yglesias / proudly eponymous since 2002: A Little Perspective.... [I]n late 2004 and early 2005, the Democrats were in danger of shrinking to become a merely regional party. Now in late 2006, the GOP is once again in danger of shrinking to become a merely regional party.... [H]ysteria... nobody is going to become merely regional -- things will just sort of swing back and forth, with the Democrats maintaining a semi-permanent reservoir of strength in the Urban Archipelago and the GOP having a similar bastion in the South...

What Lexington wrote:

Lexington | A national party no more? | The Republicans are in danger of being confined to the South: The Republicans are now engaged in a fierce debate... it is missing an important aspect.... Is the Republican Party in danger of shrinking to its southern base? And is it shrinking at exactly the same time that the Democrats are becoming a more national party?

The extent of the southernisation of the Republican Party is astonishing... all but wiped out in... the north-east... big losses in... the Mountain West.... The only place where the national tide had little impact was in the South.... [A] regional stronghold can become a prison.... [N]on-southerners have grown particularly impatient with the South's brand of in-your-face religiosity....

One should be wary of reading too much into the result of a single election.... But the Democratic advances were more than just a fluke.... The danger for the Republicans is that they will respond... by retreating to their heartland. The incoming Republican delegation will be more southern and more conservative than ever. It is hardly encouraging that the Senate Republicans have just reinstalled Mississippi's Trent Lott as one of their leaders...

Me? I remember that it wasn't all that long ago that the Economist proclaimed that George W. Bush was a political master, that the Republican Party was on its way to global dominance, and that America was becoming an ever more right-wing nation. The Economist, and especially its Lexington, were not the worst of the journamalistic clowns comparing George W. Bush favorably to Winston S. Churchill, but they were the most disappointing. You see, they knew better. And we knew they knew better. And they knew we knew they knew better. And we knew they knew we knew they knew better. But they kept on doing it.

I am bemused at the rapidity and... enthusiasm... with which Lexington appears to be switching gears. Why, on November 2 Lexington began a column by asserting that the Democrats' congressional leader was a political disaster. I call bulls--- on:

Nov 2 2006: NANCY PELOSI... made for caricature... the very embodiment of privileged liberalism... representative of a city, San Francisco, that, as far as most Americans are concerned, is synonymous with ageing hippies, lay-about trustfunders, aggressive beggars and gay parades. Ms Pelosi's public appearances do her no favours... she talks drivel... a mixture of robotic talking-points (the Republicans are guilty of “the politics of corruption”) and clumsy alliteration (the Democrats are a “great collection of idealism, intellect and integrity”). It's like listening to a cross between a Stepford wife and Jesse Jackson...

And back in March Brad Setser was calling bulls--- on:

Mar 27 2006: Brad Setser: The Economist's Lexington columnist needs to get out a bit more.... Rather amazingly, the only US public intellectuals... on... Lexington's radar screen come from the American right. The Neocon right and its pet idea (invading Iraq), the economic right and its pet idea (tax cuts), the Harvey C- Mansfield right and its pet idea (manliness). And the ubiquitous Charles Murray. Lexington could not find any public intellectuals (or ideas) from the center, the center-left or the left worthy of mention.... Or any one working on ideas to remake America's costly and increasingly dysfunctional health care system. Warmed-over proposals to provide high-income Americans with yet another tax deduction (health savings accounts) hardly count as innovative...

And back in January Brendan Nyhan was calling superbulls--- on:

Jan 10 2006: Brendan Nyhan: What is John Micklethwait talking about?... [offers] this ridiculous analysis: "As a result, a president who stormed back to power in 2004 with more votes than any previous candidate will spend a good deal of 2006 on the defensive." Using the number of votes as a metric of electoral success is ridiculous. (Ever heard of population growth?) By more standard metrics such as presidents' popular vote and Electoral College margins, Bush's re-election victory was one of the closest in history... "the smallest margin of victory for a reelected president since 1828."... Not exactly storming back to power...

And the previous November Henry Farrell was calling supersuperbulls--- on:

Nov 17 2005: The Democrats risk painting themselves as either opportunists (who turn against a war when it goes badly) or buffoons (too dim to question faulty intelligence when it mattered). They also risk exacerbating their biggest weakness—-their reputation for being soft on terrorism and feeble on national security.... Mr Bush... one big advantage: the charge that he knew all along that Iraq possessed no weapons of mass destruction seems to be a farrago of nonsense.... Mr Bush made... honest [mistakes] made for defensible reasons.... [H]e was not alone in thinking that, after September 11th, America should never again err on the side of complacency. More than 100 Democrats in Congress voted to authorise the war. But being right and being seen to be right are different things...

Not to mention this:

Nov 24, 2005: Dick Cheney may be hugely unpopular, but George Bush needs him badly...

And in March of 2005 I called supersupersuperbulls--- on the declaration that Wolfowitz's nomination to the World Bank was not a joke:

Mar 16, 2005: [Wolfowitz's] lack of experience... does not necessarily make him a bad candidate. Having served under Donald Rumsfeld... Mr Wolfowitz might... be well placed to bring radical change to an organisation sorely in need of it...

But the champion column on which supersupersupersuperbulls--- needs to be called, I think, comes from March 2003:

Jul 5 2003: Lexington: Hilary Clinton: Now the wronged woman herself... who in their right mind wants to be dragged back to Whitewater... Clintonia, that bitchy, chaotic house party where American politics summered in the 1990s?... George Bush... has done pretty well... fighting hard for his own team.... Mr Bush's capacity to elicit frenzied support from [his] core constituency.... [L]iberals can't lay a finger on Mr Bush... they are just too damn angry... read, say, Paul Krugman's columns in the New York Times and you are often left worrying less about the commander-in-chief than about the columnist-in-a-tizz.... Mr Bush: self-discipline.... There has been a palpable change in the White House's productivity: nobody was better at analysing a problem late into the night than Mr Clinton; but Mr Bush actually gets things done...

It is amusing that the Economist is unable to stammer out a proper apology for all this bulls---, like:

Notice to readers. This week's column about how the Republicans are in danger of becoming a regionalized permanent minority renders many of our earlier columns inoperative. They were all bulls---. We knew it or ought to have known it at the time. Readers wishing to apply to refunds should write to

It's Roubini Friday!

Nouriel Roubini's forecasts of imminent recession look better and better:

Manufacturing May Be Slowing, Fueling Forecasts for Fed Rate Cuts - By CHRISTOPHER CONKEY: December 2, 2006: Fresh data suggest the manufacturing sector is beginning to contract.... The Institute for Supply Management, an Arizona-based group of corporate purchasing managers, Friday said its index of manufacturing activity slid to 49.5 in November from 51.2 in October. Readings below 50 indicate contraction, and the decline ended a 41-month expansion among manufacturers.

"November was a defining month," said Norbert Ore, who oversees the survey and also serves as procurement director for paper manufacturer Georgia-Pacific Corp. "Since April we've seen a pretty consistent decline in the growth of manufacturing. Now we've moved into a no-growth position."... The bond market is pessimistic about the prospects for near-term economic growth and views inflation as contained. It expects the Fed to lower interest rates early next year in an effort to reignite the economy. Mr. Bernanke has struck a more sanguine note, saying the weakness is primarily confined to the housing market. In a speech earlier this week, he also reiterated the need to stand guard against inflation and suggested that rate cuts are unlikely in the months ahead.

Friday's data strengthened the gloomy outlook in the bond market and among other pessimists.... Futures-market traders, mulling the prospect of a manufacturing recession and slower economic growth, increased the probability that the Fed would cut interest rates by April to roughly 74% from 51% earlier in the day. And many economists lowered their outlook for economic growth this quarter after the ISM report's release. ...

Another worrisome sign for the economy surfaced Friday in a Commerce Department report on construction spending. According to the report, nonresidential construction fell in October for the second consecutive month, partially affected by a 3.1% drop in private manufacturing construction. Until recently, a surge in commercial construction had helped offset some of the pain caused by the downturn in residential construction. Residential construction retreated for the seventh consecutive month. Overall, construction spending fell 1% in October from September...

Romney Appoints Non-Scientist To Stem-Cell Board

A reason to be unhappy with Mitt Romney:

Romney Appoints Non-Scientist To Stem-Cell Board | TPMCafe: By Eric Kleefeld: Mitt Romney, who's trying to cast himself as the true conservative alternative to John McCain and Rudy Giuliani, has appointed a little-known budget planner with zero science experience to a state board which doles out funding for stem-cell research and other biotech initiatives, the Associated Press reports. Romney's pick, Aaron D'Ella, was given the job of executive director for the Massachusetts Life Sciences Center at a salary of $125,000 a year, and no search for better-qualified candidates was undertaken...

The Long Run Is Knocking at the Door...

We have been expecting this. We have been expecting this for six years: a substantial fall in the value of the dollar "in the long run." Now the long run is knocking at the door.

Will it continue? And how fast will it proceed if it does? / MARKETS / Currencies - Dollar slides further on manufacturing data: Dollar slides further on manufacturing data: By Neil Dennis: A turbulent week for the dollar ended with further sharp falls after manufacturing activity in the US contracted for the first time since April 2003. The dollar plunged as low as $1.9847 against sterling and to $1.3348 against the euro on Friday after the Institute of Supply Management’s manufacturing index fell unexpectedly to 49.5 in November, from 51.2 in October. This signalled that manufacturing activity in the US contracted in November after more than three years of growth.

“The ISM index is likely to be alarming for the Federal Reserve given its dual mandate for both growth and inflation,” said James Knightley, at ING Financial Markets. “If the economy slows in line with the ISM, inflation worries will quickly dissipate with the prospect of rate cuts.” A run of weak US data this week has dogged the greenback, adding to a combination of bearish factors. The weak data has heightened expectations that the Federal Reserve will begin cutting US interest rates. This has led to concerns that high levels of risk, such as carry trades, which had hitherto supported the dollar, could be unwound.

The acceleration of dollar losses has amplified the chorus of central bankers talking about diversifying their reserves into other currencies, such as sterling and the euro. Benign inflation data on Thursday took away another crutch for the dollar, with many traders predicting that sterling would soon rise to more than $2.

The sharp dollar declines began last week as a number of central bankers, including the People’s Bank of China, raised concerns that their huge currency reserves could be at risk from the weak US currency. This reignited fears that central banks might be considering a significant shift away from exposure to the dollar.... “Carry trades are high risk, and even without a narrowing of interest rate differentials they might be unwound if investors start to anticipate greater currency volatility,” said Simon Hayley at Capital Economics. Over the week, the dollar fell by 1.7 per cent against the euro, to $1.3322, and by more than 2 per cent against sterling to $1.9798. The dollar’s fall against the yen, one of the most favoured carry trade funding currencies, was less marked, however, and it ended Friday at Y115.26, down 0.6 per cent on the week...