## As If an Invisible Hand Had Played a Losing Card...

Gavin Kennedy sets out all the things that Adam Smith did not mean by "invisible hand," and the historical process of misreading by which the phrase acquired the meaning we give it.

What did Smith mean? These:

• That the love of power and authority by the rich induces them to trade real resources to the poor in return for deference, which has an enormous levelling effect on the true distribution of income.
• That the fear of merchants of the strange and foreign leads them to concentrate their investments at home to the benefit of domestic workers.

Smith focused--quite rightly--on what Kenneday aptly terms "emergent order." "Invisible hand" is a metaphor we use for "emergent order." But Smith did not use it so.

But Daniel Klein comments on Gavin Kennedy, and strikes out. It is not even clear that Klein knows what home plate is, and that he is supposed to swing the bat over it:

We will never know whether Smith intended the phrase invisible hand to serve as a tag for the comparative merit of freedom. It certainly is not outlandish to think that he did. As Minowitz (2004, 407) puts it, Smith all but “evicts God” from WN, making the invisible hand all the more striking.... Gavin notes that the phrase appears only infrequently in Smith’s work.... But... [t]hat the phrase appears close to the center, and but once, in TMS and in WN might be taken as evidence that Smith did intend for us to take up the phrase.

It is fun... to speculate that... Smith had the notion of invisible hand occurring but once in each of his masterworks, and in each case near the center. The invisible hand passage in WN is just about dead center. As for TMS, Hamish Riley-Smith... has kindly informed me that the invisible hand passage occurs at page 273, while the whole is 436 pages plus 10 unnumbered pages including title and contents.... In the 6th edition, however, the passage comes closer to the center. Moreover, the 3rd, 4th, 5th, and 6th editions were published with Smith’s essay on language following the text of TMS, and hence in those editions the passage may have been quite close to the center of the combined pages.... But it does not much matter whether Smith intended the phrase to serve as a tag for the comparative merit of freedom. The phrase is as worthy a tag as any for that worthy idea...

## Are They or Aren't They?

Put me on record as saying that the Federal Reserve is making a bad mistake if Treasury ten-year bond yields rise far above 3% while the unemployment rate is still rising.

Jon Hilsenrath:

Fed’s Not Targeting Long Bond Rates: Bond investors have spent a lot of time in recent weeks wondering whether the Federal Reserve would increase its purchases of long term Treasurys now that yields on 10 year notes have pushed up beyond 3%. Fed Chairman Ben Bernanke offered some insight into his thinking on the issue at a hearing of the Joint Economic Committee.

The move above 3% isn’t fundamentally important, he suggested. “We are not targeting a particular interest rate” with the long term Treasury note purchase program, he said. That’s not to say the Fed won’t decide later to buy more Treasury bonds than already announced. Mr. Bernanke said he believed the program was helping to bring down private sector interest rates, many of which are benchmarked off of Treasury bonds. But it does suggest bond investors shouldn’t be so hung up on the 3% rate.

## At Least the Decline Isn't as Bad as in the First Quarter

Chris Robb:

Jobless claims jump on Chrysler bankruptcy: WASHINGTON (MarketWatch) -- The number of new claims for state unemployment benefits jumped in the latest week as workers from Chrysler joined the ranks of the unemployed, according to official data released Thursday. Initial jobless claims rose 32,000 to a seasonally adjusted 637,000 in the week ended May 9, the Labor Department reported. This put the number at the highest level since mid-April. Claims had hit a three-month low in the prior week....

Continuing jobless claims rose by 202,000 in the week ended May 2 to a record seasonally adjusted 6.56 million. The April employment report, released last Friday, showed that the jobless rate rose to 8.9%, the highest since September 1983. See full story. But analysts have focused on the recent downward trend in claims. Claims hit a peak of 674,000 in late March. Economists had expected claims to move higher this week. Roughly 27,000 hourly employees of Chrysler were laid off in the wake of the company's bankruptcy filing. There were also layoffs at parts suppliers.

## Berkeley Political Economy 101: Reference Document DRAFT

Title:

Modern Theories of Political Economy

Prerequisites:

Completion of PE 100 and IAS 45 are required before students can register for the course.

Sequence:

Students intending to become Political Economy majors are expected to complete PE 101 by the end of their sophomore year.

Objectives:

PE 101 is examines modern approaches of the interaction between economics and politics--what in an earlier age would have been called "moral philosophy." Building on the knowledge of world history covered in IAS 45, it focuses on the usefulness of alternative theories of political economy, both the classical theories covered in PE 100 and the modern theories of the 20th and 21st centuries in the their historical context. The course is explicitly interdisciplinary: theories of political economy cannot do their job if they are constrained by discipinary boundaries. It is a thoeretical course: empirical and historical facts are used as aids to theoretical comprehension and yardsticks to assess the usefulness of alternative theoretical perspectives.

The first two-thirds or so of the course will introduce students to general theoretical works and current intellectual debates in political economy. The last third or so of the course will specialize. Political Economy majors here at Berkeley tend to concentrate in one of five areas:

• the political economy of post-industrial societies,
• economic develpment and political democratization,
• international relations and globalization,
• comparative political and economic systems,
• modern China.

The last third of each course should focus on those aspects of political economy theory that will be most useful to students concentrating in one (or at a pinch two) of these area.

Instructors are not expected to cover all of the topics or assign all the authors listed below, but they should discuss enough topics and assign enough authors to span the space of political economy.

Topics:

Political economy and war, market and non-market systems, distributive justice, libertarianism and communitarianism, liberal democracy and regulated capitalism, social democracy and mixed economy, international economic orders and American hegemony, globalization, public choice, late development successes, late development failures, worlds of welfare capitalism, neoliberalism and its discontents, market reforms in post-industrial economies, transitions from communism, political economy and the digital age.

Authors:

George Akerlof, Benedict Anderson, Norman Angell, Hannah Arendt, Benjamin Barber, Robert Bates, Simone de Beauvoir, Isaiah Berlin, James Buchanan, Nancy Chodorow, Ronald Coase, Milovan Djilas, Anthony Downs, Barry Eichengreen, James Fallows, James Ferguson, Betty Friedan, Michel Foucault, Robert Frank, Milton Friedman, Francis Fukuyama, Alexander Gerschenkron, Friedrich Hayek, Peter Hall, Robert Heilbroner, Albert Hirschman, John Hobson, Stephen Holmes, Tony Judt, John Maynard Keynes, Charles Kindleberger, Jeane Kirkpatrick, Janos Kornai, Paul Krugman, Timur Kuran, Vladimir Lenin, Arthur Lewis, Charles Lindblom, Charles Maier, Hyman Minsky, Mancur Olsen, George Orwell, William Pfaff, Karl Polanyi, John Rawls, Robert Reich, Dani Rodrik, Elaine Scarry, Joseph Schumpeter, James Scott, Amartya Sen, Robert Shiller, Judith Shklar, Jessica Stern, Joseph Stiglitz, Gordon Tullock, Michael Walzer, Eugen Weber, Fareed Zakaria.

Course Boundaries vis-a-vis PE 100:

This course covers the twentieth century world since the Great Depression, which is where PE 100 ends. At most a week should be spent on pre-Depression theorists and events in this course, allowing students to see the ways in which the project of classical political economy set the stage for new kinds of theory to be discussed in PEIS 101.

Assessments and Assignments:

The material lends itself to in-class exams, take-home exams, and research papers. Each instructor cam generate those kind of assignments that work best with that instructor’s teaching. At least three written assignments/exams should be required over the course of the semester, in order to observe student improvement. Provide studente with as many opportunities as possible to reflect upon tbe course content: it will be new and strange to many

Course Instructional Support:

Since the last budget crisis this course is without GSI support. The hope is that capping PE 101 sections at 50 will allow for meaningful interaction to take place in the lecture itself.

Appendix: Bev Crawford's Outline:

1. Theoretical Perspectives on Political Economy (4 weeks)
• The Political Economy of Freedom (Liberalism)
• The Political Economy of Equality (Distributive Justice, Socialism, Social Democracy)
• The Political Economy of Community (Communitarianism and Nationalism)
2. 20th Century Theory and 20th Century History * Liberal, Really-Existing Socialist, Nationalist, and Social Democratic Systems * How they worked and didn't work
• Political Governance of the International Economy
• How it worked and didn't work
• Three Crises
• The Great Depression
• The Asian Financial Crisis
• The Current Financial Crisis
3. Political Economy Theory and Economic Development
4. Political Economy Theory and 21st Century Globalization
5. Political Economy Theory and 21st Century Post-Industrial Societies

## Berkeley Political Economy 100: Reference Document DRAFT

Title:

Classical Theories of Political Economy

Prerequisites:

NONE

Sequence:

Ideally students intending to major in Political Economy should complete PE 100 by the middle of their sophomore year.

Objectives:

Students must apply critical thinking skills to engage classical theories of political economy as they were originally written in primary sources. These primary sources may be bolstered, should the instructor choose, with some additional reading material explicating salient points of each text. The course should generally be chronological. Students should engage the writers and their ideas, and confront the ideas of one theorist with those of another, so that they can see hoq ideas grow out of other ideas in their particular historical contexts.

Students should learn the basic historical thinking skills, among them analysis; argumentation; chronological reasoning; interpretation; contextualization; comparison; and synthesis. Students should also be given practice at other critical thinking skills, such as Inquiry, as the instructor sees fit.

Topics:

The principal aim of the course is to engage the students with the central question of political economy: the evolving relationship between the state and the economy as analyzed in the “classical” texts which discuss (1) connections between people and their rulers; (2) the nature and purpose of the state; and (3) linkages between states and their economies. The inevitable focus of the course is the rise of liberalism and the various responses to it

Subjects that ought to be covered in each iteration of PE 100 include but are not limited to: mercantilism, capitalism, industrialization, liberalism, Marxism, socialism, imperialism, nationalism, and internationalization. Students should be constantly considering the applicability of the "classical" theories to the present day. Instructors follow their own judgment in assigning relative weight to these subjects and the degree of engagement of the course with current headlines.

Authors:

Thomas Hobbes, Leviathan; John Locke, Two Treatises on Government; Adam Smith, Wealth of Nations; Jean-Jacques Rousseau, Discourse on Inequality and/or On Social Contract; Mary Wollstonecraft, Vindication of the Rights of Women; Thomas Malthus, Essay on Population; David Ricardo, Principles of Political Economy; Friedrich List, National System of Political Economy; Karl Marx, Das Kapital; Karl Polanyi, The Great Transformation; Max Weber, “On Bureaucracy” and/or The Protestant Ethic and the Spirit of Capitalism; V.I. Lenin, “Imperialism: the Highest Stage of Capitalism”; Joseph Schumpeter, Imperialism. In addition, students should be familiar with the work of J.M. Keynes

Course Boundaries vis-a-vis PE 101:

This course covers the early modern world (but may go back to antiquity or the middle ages) and the modern world ending with the Great Depression, which is where PE 101 will begin. At most a week should be spent on Keynesian political economy in this course, allowing students to see the ways in which he synthesized the classical theorists and set the stage for new kinds of theory to be discussed in PEIS 101.

Assessments and Assignments:

The material lends itself to in-class exams, take-home exams, and research papers. Each instructor cam generate those kind of assignments that work best with that instructor’s teaching. At least three written assignments/exams should be required over the course of the semester, in order to observe student improvement. Provide studente with as many opportunities as possible to reflect upon tbe course content: it will be new and strange to many

Course Instructional Support

This course has--until the next budget crisis--weekly GSI-led sections. Students find the material difficult, and having a regular weekly discussion section is usually the best way for them both to practice their critical thinking skills and internalize content.

Appendix: The Larger Barrington Moore Problematic:

Thomas Hobbes, Leviathan

John Locke, Second Treatise of Government, Letter on Toleration

Jean-Jacques Rousseau, Discourse on the Origin of Inequality, The Social Contract

David Hume, Of Commerce, Of the Balance of Trade, Of the Original Contract, Idea of a Perfect Commonwealth

Bernard de Mandeville, Fable of the Bees

Albert Hirschman, The Passions and the Interests

Adam Smith, Theory of the Moral Sentiments, Inquiry into the Nature and Causes of the Wealth of Nations

Thomas Paine, Common Sense

James Madison, Alexander Hamilton, and John Jay, The Federalist

Mary Wollstonecraft, A Vindication of the Rights of Women

William Godwin, An Enquiry Considering Political Justice

Edmund Burke, Reflections on the Revoution in France, Letters on a Regicide Peace

Joseph de Maistre, Essay on the Generative Principle of Political Constitutions

Thomas Malthus, Essay on Population

David Ricardo, Principles of Political Economy

Friedrich List, The National System of Political Economy

Alexis de Tocqueville, The Old Regime and the French Revolution, Democracy in America, Recollections

Karl Marx, Introduction to the Critique of Hegel's Philosophy of Justice, Communist Manifesto, Wage Labor and Capital, Class Struggles in France, Preface to A Contribution to the Critique of Political Economy, Capital, Critique of the Gotha Program

Thomas Carlyle, Occasional Discourse on the Nigger Question

John Stuart Mill, Essay on Bentham, Essay on Coleridge, On Liberty, The Subjection of Women, Principles of Political Economy

Max Weber, Politics as a Vocation, Science as a Vocation, The Chinese Literati, The Protestant Ethic and the Spirit of Capitalism, The City, Class, Status, Party, Bureaucracy

Thorstein Veblen, The Theory of the Leisure Class

Emile Durkheim, Elementary Forms of the Religious Life

Vladimir Lenin, Imperialism: the Highest Stage of Capitalism

Joseph Schumpeter, Imperialism

Sigmund Freud, Group Psychology and the Analysis of the Ego, Civilization and Its Discontents

John Maynard Keynes, The Economic Consequences of the Peace, Essays in Persuasion

Karl Polanyi, The Great Transformation

Barrington Moore, Social Origins of Dictatorship and Democracy

## Berkeley International Studies 45: Reference Document DRAFT

Title:

World History

Prerequisites:

NONE

Sequence:

Ideally students intending to major in Political Economy should complete IAS 45 by the middle of their sophomore year.

Objectives:

Instructors must use a hybrid chronological-thematic organization. Within this model with, however, a great deal of leeway--there are many cases that can be used to illustrate colonization, of which only a very few can be taught colonization. Concepts are more important than the details; details are useful only as illustrations of larger processes. Thus world or global history differs from a series of regional histories in which students face a different country each week. The course should take a global rather than a civilizational approach.

Without reliable and detailed information about the past historical thinking is not possible. Yet historical analysis involves much more than the compilation and memorization of data. It requires the cultivation of seven distinct albeit interrelated and overlapping intellectual skills: analysis; argumentation; chronological reasoning; interpretation; contextualization; comparison; and synthesis. Students must learn these modes of historical thinking.

Topics: Periods and Themes:

No more than 20% (3 weeks) of the course should be spent before 1450. The focus of the course not be on the twentieth century. Otherwise, istructors are free to weight each period as they choose.

Periods:

• Period 1: pre-1450: (1) The peopling of the earth and the Neolithic Revolution; (2) state development and interaction; (3) the development and expansion of networks of communication and exchange; (4) the rise of cultural systems including religion.
• Period 2: c. 1450-c. 1750: (1) Globalizing networks of communication and exchange; (2) new forms of social organization and modes of production; (3) types and varieties of colonialism and empires.
• Period 3: c. 1750-c.1900: (1) imperialism and territorial expansion; (2) ideologies, revolutions and reforms; (3) industrialization and global capitalism; (4) global migration.

• Period 4: c.1900-present: (1) dissolution of global empires and the rise of nationalism; (2) global war and conflict; (3) new global institutions.

Themes:

• Theme 1: humans and their environment: during prehistory as hunters, fishers, and foragers whose migrations led to the peopling of the earth; since the agricultural revolution as farmers or pastoralists constrained by environmental factors such as rainfall patterns, climate, and available flora and fauna; intensified exploitation of nature as populations grew, migrated, and increased exponentially during the industrial revolution; the balance of sophisticated technology and limited natural resources; cities, trade networks, and diseases; the rise of global environmentalism.

• Theme 2: cultural evelopment and interaction: the origins, uses, dissemination, and syncretic adaptations of ideas, beliefs, and knowledge within particular societies and in circulation across societies; study of belief system(s) or religions, philosophical interests, and technical and artistic approaches as a key to understanding how the society views itself and others and how it responds to challenge; transmission and adaptation of culturel components at boundaries; the uniqueness and commonalities of human expressions and abilities; cultural trends and trace their influence across human societies.

• Theme 3: state building, expansion, and conflict: hierarchical modes of domination and their conflicts; state forms (e.g. kingdoms, empires, nation-states) across time and space; organizational and cultural foundations of long-term stability; internal and external causes of conflict on the other; contextualizing state development and expansion in relation to different modes of production (e.g. agrarian, pastoral, mercantile), cultural and ideological foundations (e.g. religions, philosophies, ideas of nationalism), and social and gender structures; interstate relations--war, diplomacy, and international organizations.

• Theme 4: creation, expansion, and interaction of economic systems: patterns and systems to produce, distribute, and consume desired goods and services across time and space; major transitions between modes of production; labor systems; ideologies, values, and institutions (such as capitalism and socialism) that support and sustain modes of production and forms of labor organization; trade and commerce; regional and global networks of communication and exchange and their relation to economic growth; cultural and technological diffusion, migration, state formation, social classes, and human interaction with the environment.

• Theme 5: the development and transformation of social structures: human societies group their members and pattern interaction across social groups; stratification based on gender roles, kinship systems, racial and ethnic associations, and hierarchies of wealth and class; processes through which such categories and practices were created, maintained, and transformed; connections between changes in social structures and other historical shifts, especially trends in political economy, cultural expression, and human ecology.

Assessments and Assignments:

Instructors must assign students a research paper that requires them to use primary source documents of some kind (either the student’s or the instructor’s choice). The paper must be submitted in stagesto give students a chance to master historical thinking skills and obtain feedback from the instructor and/or GSI. The paper should be no more than a dozen pages. Instructors must provide a final eam. All exams including midterms (if any) should require students to demonstrate critical and historical thinking skills--not simply the regurgitation of factual content.

## Republicans Plan to Rename Selves...

I hear that the Republican Party plans next week to rename the Democratic Party the "Democratic Socialists"... ... And to rename themselves the "National Socialists." (I don't think the Republican Party has even an infinitesimal connection or affinity or similarity to the NSDAP--but I do think that Republicans ignorant enough to think BHO is any kind of socialist are so ignorant that they almost surely have no clue what NSDAP stands for.)

## Yves Smith: Preventing the Next Financial Crisis by Reforming Wall Street Pay

Yves Smith leads those of us who want Silicon-Valley compensation schemes for Wall Street:

naked capitalism: Obama Administration Considering Tackling Financial Services Pay: Before anyone gets hysterical, the focus of the efforts by Team Obama on financial services industry pay appears to be to force the industry to stop rewarding undue risk taking. As much as I have been critical of many Administration plans, this, at least in concept, is a good one. Why? Because I sincerely doubt Team Obama will do more than set guidelines and principles. and that may not even prove necessary if they show enough resolve. If the industry wasn't so predictably out to keep all its perquisites despite its horrific performance, this sort of effort would not be necessary. We've had some fulminating by Goldman CEO Lloyd Blankfein, plus an earlier line of thought in a Financial Times comment mainly on the failings of risk management:

More generally, we should apply basic standards to how we compensate people in our industry. The percentage of the discretionary bonus awarded in equity should increase significantly as an employee’s total compensation increases. An individual’s performance should be evaluated over time so as to avoid excessive risk-taking. To ensure this, all equity awards need to be subject to future delivery and/or deferred exercise. Senior executive officers should be required to retain most of the equity they receive at least until they retire, while equity delivery schedules should continue to apply after the individual has left the firm.

This would take the firms a fair bit of the way back to the old partnership model. Funny how they were more careful about risk when it was their own capital on the line. But the exposure in those days was even greater, since the partners are personally liable. LTCM managed to blow itself up even though its principals have almost all of their money invested it. Yes, this would be a huge step in the right direction, but I wonder if any model that involves limited liability, other people's money, and a government backstop (which we now know is guaranteed for big players) is still a troublesome mix. But fine sentiments are no substitute for action, and there seems to have been perilously little, save UBS's malus plan, in which much of the bonus is put in escrow and may be reduced if some of the recipient's actions are found to have been damaging to the bank.

The problem with any action on the bonus structure front is that it needs to be reasonably broad based. One firm acting alone, save perhaps Goldman, is likely to expose itself to defections if its program is too far out of line with industry norms. Thus if the industry has any sense, Team Obama's pressure will presumably elicit responses from the industry. Note that some of the ideas being bandied about apply to traditional lenders, such as banning rewards based on meeting volume targets, which creates incentives to ignore loan quality. From the Wall Street Journal:

The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter. The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance.... Among ideas being discussed are Fed rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank -- such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing "best practices" to guide firms in structuring pay. At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government's ability both to monitor compensation and to curb incentives that threaten a company's viability or pose a systemic risk to the economy.... But any legislation passed would make it harder for policy makers to dial back limits once the financial crisis subsides...

Yves here. Please. That last sentence is editorializing. How many rules and laws went unenforced in the last cycle? And if bad incentives lead banks to take risks that pose a danger to the system, which they have, trying to influence their practices is not a bad concept. Have we forgotten that banks run off the cliff like lemmings at least every ten years? The bigger point is that banks are subject to taxpayer backstops. That puts them in a very different category than most businesses. Since the banks have abused their access to the public till, more intrusive policies are called for. Back to the article:

Regulators have long had the power to sanction a bank for excessive pay structures, but have rarely used it.... Government officials said their effort, which is just beginning, isn't aimed at setting pay or establishing detailed rules. "This is not going to be about capping compensation or micro-management," said an administration official. "It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation." Despite the banking industry's weakened state, it would likely try to push back against curbs on how financial firms can compensate people. Bank executives have complained to federal officials that strict rules could prompt some of their best employees to move to parts of the financial industry that aren't regulated, such as hedge funds, private-equity firms and foreign banks. They've also argued that paying substantial bonuses is integral to how the industry works....

During a recent congressional hearing, Chairman Ben Bernanke said the Fed was working on rules that will "ask or tell banks to structure their compensation, not just at the very top level but down much further, in a way that is consistent with safety and soundness -- which means that payments, bonuses and so on should be tied to performance and should not induce excessive risk." In an indication of how broad the effort may become, Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators need to examine compensation practices in the mortgage industry, suggesting new limits could stretch beyond banks...

## Why Newspapers Have No Friends

Why oh why can't we have a better press corps?

Matthew Yglesias explains why very, very few people outside the newspaper industry think that it is worthwhile to try to slowdown the transition from fishwrap, or to try to ensure that the organizations and reporters that produce fishwrap have a place in the internet-driven public infosphere of the twenty-first century:

"There was a conscious effort on our part to counter some of the criticism of The Inquirer as being a knee-jerk liberal publication,” Mr. Jackson said. “We made a conscious effort to add some conservative voices to our mix.”

Mission accomplished!

A lot of people I’ve interacted with in the newspaper industry seem a bit taken aback that some nice, decent, reasonable liberal people aren’t actually all that sympathetic to their plight. But this right here is the rub. Some 30-40 years ago, the mainstream media came under sustained attack from the conservative movement. The critique was that, basically, the press should compromise its mission of doing its best to tell the truth and instead give equal rate to the truth and to whatever the conservative movement wanted to convince people of on any given day. Virtually every institution decided that the best way to cope was to slowly but surely give in to that pressure.

Meanwhile, technological change has undermined the financial viability of a lot of these institutions. And now they’re feeling sorry for themselves. But the very same changes open up possibilities for new institutions--institutions that are not as compromised by decades-worth of burning their own credibility--to do amazing work. On balance, I’m excited about the new era.

With this as context, it is worth looking at Ezra Klein's thoughts on his forthcoming move to the Washington Post from the American Prospect:

Ezra Klein Weblog: This will be my last real blog post at The American Prospect.... Monday, [my weblog] will move to the Washington Post.... http://voices.washingtonpost.com/ezra-klein/.... [T]oday does mark an end. I've been at TAP for almost four years. I moved to Washington, DC in September of 2005 to take the writing fellowship.... And there's not been a day that I haven't been proud to work here.

That's true, of course, because of the magazine's politics. But also because of its approach. The Prospect is one of the few unrepentantly wonkish outfits in existence. It's one of the few magazines where I could've pitched a profile of Congressional Budget Director Peter Orszag -- this was before he became a star, mind you -- and been given the enthusiastic go-ahead.... Pause on that for a minute. The Prospect, to its credit, has always rejected the idea that readers wouldn't be interested in something even though it was important.... [W]e've... learned to pay attention to adult things. The Prospect has been doing that for almost two decades now, and they provided me with a home to do the same. And the Prospect was right. Turns out that you can build an audience with charts and graphs and hearings and budget commentary. The words "reconciliation," "nationalization," and "community rating" do not scare readers away. Scatterplots do not harm your traffic. Indeed, the Washington Post is asking me to cover the same topics in the same way at their site. But I would never have had this opportunity, or been able to build this model, without TAP -- both the space it gave me and the guidance it provided me. I'll be forever grateful to it.

Which is why, even though I'm leaving, I urge you to stay. That's not to say you shouldn't immediately bookmark my new blog and check it obsessively.... But make sure Tapped is on your blogroll, too. And make sure you're receiving the American Prospect magazine at home. And make sure you're checking out the [American Prospect] homepage every morning.

This is most interesting for me because of what Ezra does not say. He does not say that he will be proud every day to work for the Washington Post: how could he after the past decade? Nobody is. He doesn't say that you should make sure you are checking out the Washington Post's homepage every day: how could he?

It is interesting that Ezra says that the Brauchli Post news division is hiring him to do the kind of writing that would have gotten him fired for the Downey Post news division in a New York minute...

UPDATE: The Philadelphia Inquirer defends it's hiring of John Yoo by saying that people don't care what it publishes.

Steve Benen reports:

The Washington Monthly: YOO CAN'T BE SERIOUS.... The Philadelphia Inquirer's defense for hiring John Yoo as a columnist was even worse yesterday than it was the day before:

Harold Jackson, The Inquirer's editorial page editor, said he was surprised by the sudden delayed anger directed his way over Mr. Yoo. He said the decision to hire a columnist was his, but that "Mr. Yoo was suggested by the publisher," Brian Tierney. "There was a conscious effort on our part to counter some of the criticism of The Inquirer as being a knee-jerk liberal publication," Mr. Jackson said. "We made a conscious effort to add some conservative voices to our mix." Asked if the release of the memos affected his view of hiring Mr. Yoo, Mr. Jackson said: "From a personal perspective, yes. We certainly know more now than we did then, but we didn't go into that contract blindly. I'm not going to say the same decision wouldn't have been made." But Tierney said the memos did not alter his opinion.

This doesn't work at all. First, there was "delayed anger" because no one knew -- and the paper didn't announce -- that the Inquirer had actually hired Yoo until this past weekend. As a rule, people rarely complain about a development before learning about it.

Second, hiring the author of torture memos to prove the paper isn't liberal is just crazy. The Inquirer, which publishes in one of the nation's most Democratic cities, is already paying Rick Santorum, for crying out loud. What some in the media fail to realize is that reflexive conservatives, who expect all news outlets to follow the standards of Fox News and the Wall Street Journal editorial page, won't be impressed. Republicans who think the paper is a "knee-jerk liberal publication" will continue to think that whether or not it pays John Yoo for poorly written columns.

I was most surprised, though, to see the Inquirer brass say they just didn't care much about Yoo's work. It seemed at least plausible to me the paper might argue, "When we hired Yoo, the torture memos hadn't been released yet." That wouldn't have been persuasive -- Yoo's record and tolerance for routine law-breaking was already clear -- but it would have at least offered the Inquirer some deniability. Yoo was hired in November 2008; Yoo's memos were released in April 2009.

But the paper's publisher and editorial page editor seem largely unfazed, and suggested Yoo would have been hired anyway. The torture advocate runs the risk of getting arrested if he leaves the country, but the Inquirer is nevertheless pleased to pay him to share his insights on current events.

There are probably some creative, thoughtful right-of-center writers in Philly who could write some interesting columns. The problem isn't that the Philadelphia Inquirer hired another conservative, it's that the paper hired someone who made alleged war crimes possible.

Post Script: Tierney told the NYT few of his readers actually care about this: "I've gotten more mail recently on our making our comics smaller than I have on John Yoo." Here's hoping that changes fairly soon.

## And His Nobel Prize!

Josh Marshall:

Just Thinking | TPM: If, as Dick Cheney's daughter says, Cheney's torture crusade is like Al Gore global warming activism, can't he hurry up and form his pro-torture organization and shoot his movie?

## We Are Not Getting Our Money's Worth Out of NPR

Just saying. Ari Kelman::

Tortured logic. « The Edge of the American West: Did NPR ever not suck? That’s a serious question, by the way, as I’ve begun to doubt my memories of public radio’s glorious past. Anyway, I was trapped in my car yesterday and had no choice but to tune in to “Talk of the Nation”. Lucky me, I got to hear Neal Conan’s inane effort to be fair and balanced about torture (listen here — if you dare). I almost drove into incoming traffic to end the pain...

## How Much Intellectual Steam Did the Conservative Movement Ever Have?

Richard Posner writes that the American conservative movement is losing intellectual steam:

Is the Conservative Movement Losing Steam? Posner: Until the late 1960s (when I was in my late twenties), I was barely conscious of the existence of a conservative movement. It was obscure and marginal... Barry Goldwater... Ayn Rand, Russell Kirk, and William Buckley--figures who had no appeal for me. More powerful conservative thinkers... Milton Friedman... Friedrich Hayek... George Stigler, were on the scene, but were not well known outside the economics profession.

The domestic disorder of the late 1960s, the excesses of Johnson's "Great Society," significant advances in the economics of antitrust and regulation, the "stagflation" of the 1970s, and the belief (which turned out to be mistaken) that the Soviet Union was winning the Cold War--all these developments stimulated the growth of a varied and vibrant conservative movement... free-market economics... "neoconservatism" in the sense of a strong military and a rejection of liberal internationalism... cultural conservatism, involving respect for traditional values, resistance to feminism and affirmative action, and a tough line on crime.

The end of the Cold War, the collapse of the Soviet Union, the surge of prosperity worldwide that marked the global triumph of capitalism, the essentially conservative policies, especially in economics, of the Clinton administration, and finally the election and early years of the Bush Administration, marked the apogee of the conservative movement.... By the end of the Clinton administration, I was content to celebrate the triumph of conservatism as I understood it, and had no desire for other than incremental changes.... I saw no need for the estate tax to be abolished, marginal personal-income tax rates further reduced, the government shrunk, pragmatism in constitutional law jettisoned in favor of "originalism," the rights of gun owners enlarged, our military posture strengthened, the rise of homosexual rights resisted, or the role of religion in the public sphere expanded. All these became causes embraced by the new conservatism that crested with the reelection of Bush in 2004....

[T]he policies of the new conservatism are powered largely by emotion and religion and have for the most part weak intellectual groundings... weak in conception... failed in execution... political flops.... The major blows to conservatism... have been fourfold: the failure of military force to achieve U.S. foreign policy objectives; the inanity of trying to substitute will for intellect as in the denial of global warming, the use of religious criteria in the selection of public officials, the neglect of management and expertise in government; a continued preoccupation with abortion; and fiscal incontinence in the form of massive budget deficits, the Medicare drug plan, excessive foreign borrowing, and asset-price inflation.

By the fall of 2008, the face of the Republican Party had become Sarah Palin and Joe the Plumber. Conservative intellectuals had no party.

And then came the financial crash last September and the ensuing depression. These unanticipated and shocking events have exposed significant analytical weaknesses in core beliefs of conservative economists concerning the business cycle and the macroeconomy generally. Friedmanite monetarism and the efficient-market theory of finance have taken some sharp hits, and there is renewed respect for the macroeconomic thought of John Maynard Kenyes, a conservatives' bête noire...

At least Posner knows (unlike his co-blogger Gary Becker) what "conservatism" means.

But is he arguing that conservatism has lost steam or that it never had much steam in the first place?

Richard Posner sees things wrong with Bush era conservatism:

• fiscal incontinence
• the inanity of trying to substitute will for intellect
• cultural-conservative issues ("continued preoccupation with abortion" "religious criteria in the selection of public officials")
• the failure of military force as a first resort in attempting to achieve U.S. foreign-policy objectives

But weren't these also the key components of the Reagan administration. Ronald Reagan was the original fiscal incontinence. And the substitution of will for intellect--was it ever any greater than in the rush to cut taxes to raise revenues, or in Alexander Haig's belief that U.S. national security would be enhanced if the IDF gave the Syrian army a thrashing in Lebanon? We had to rely on the alliance of Nancy Reagan and her astrologer to get a sane policy toward Gorbachev, for God's sake. And cultural conservatives--if I understand Posner, his complaint is that Reagan paid them only lip service and they patiently sat in the back of the bus and were quiet, while Bush, Palin, and Joe the Plumber take them seriously.

And, of course, the piece of Reagan-era conservatism of which Posner was most proud--deregulation and the trimming-back of government--has either turned out to be (a) destructive, or (b) accomplished by Carter and Clinton.

How much intellectual steam did hte conservative movement ever have?

## John Quiggin Should Write a Book

Over at Crooked Timber Miracle Max writes:

Benefits of blogging: The discredited ideas theme really needs a book, and JQ appears to be the ideal person to write it. I will even contribute the title: “Dead Ideas from New Economists.” No charge.

The reference is to:

## Republicans: The Stupid and Immoral Party

Jonathan Chait on Fred Barnes:

Fred Barnes, Moral Philosopher: Fred Barnes is in top form in his latest Weekly Standard piece urging Republicans to be the party of no. This paragraph in particular deserves to be savored:

Obama says his policy to restrict greenhouse gases, known as cap and trade, is "market-based." It isn't. The cap on emissions would be imposed by a government panel. Polls show the majority of Americans disapprove of this. Worse for Obama, Frank Newport, the Gallup boss, says most Americans don't believe global warming poses a serious danger. So why choke off economic growth?

This constitutes the entirety of Barnes' advice to the GOP on how to handle global warming. I have not left anything out. It's pretty remarkable. First of all, he says that a cap ongreenhouse emissions is "market-based" because the government sets it.I think nearly any economist would tell you that the issue here is that the market does not have any price mechanism to account for the externality of greenhouse gas emissions. Someone has to set that limit in order for the market to establish a price, otherwise the price would be zero. If Barnes means it's not market-based because the governemnt is setting a cap on emissions, then he's saying the only "market-based" plan is to do nothing.

Even funnier, if it wasn't so morally deranged, is the way Barnes cites a poll showing little concern for global warming and immediately concludes that nothing should be done. Uh, Fred, aren't you skipping the step where you say that Americans are correct to think global warming is not a danger? I mean, that view's totally at odds with the scientific consensus, but saying so at least gives the the veneer of caring about something other than the short-term political interests of the GOP.

For ten years from 1985 to 1995 Fred Barnes was senior editor and Washington Correspondent for the New Republic. I still haven't received my abject, personal apologies from Michael Kinsley, Hendrick Hertzberg, and Andrew Sullivan for promoting his career.

Just saying.

## Notes and Handouts for Berkeley Physics Colloquium, May 11, 2009

• The fall in the adult employment-population ratio
• The increase in risk and the collapse in risk tolerance
• The fall in monetary velocity
• What determines monetary velocity?
• Policy to fix it 1: dump money into the economy
• Unjust enrichment
• Inflationary overhang
• Might not work when i<<1
• Policy to fix it 2: raise Treasury bond interest rates
• By making Treasury bonds less attractive to hold--flood the zone
• But then you have to spend the money you have earned by selling the Treasury bonds
• By making corporate bonds more attractive to hold
• Guarantees
• Asset repurchases
• Bank recapitalizations
• How did we get here?
• Herd behavior
• Short horizons
• Limits to arbitrage
• What do we do for the long term?

## CIA Sleep Deprivation, Torture Reporting, and Journalistic Ethics

One reason that we academics tend to judge journalists harshly is because of their... excessive claims of originality. We tend to believe strongly that situating your work and your contribution in the ongoing discussion is one of the very first duties of a writer--and a duty that is absolutely essential to any attempt to inform or educate readers.

Journalists act differently. They try to make their readers as ignorant as they can about where the information is coming from. In my view, this is both unethical and ineffective: it tends to lead to great suspicion of American journalists, and a discounting of what they write:

Now comes Greg Miller of the Los Angeles Times refusing to acknowledge what appear to be very substantial dependencies on Spencer Ackerman and Hilzoy.

Let's pick up the trail. On April 29, Spencer Ackerman wrote in the Washington Independent:

A Torture Mystery: How Did the CIA Come to Use Stress Positions for Sleep Deprivation? Hidden in plain sight in the Office of Legal Counsel memos on the CIA interrogation is a mystery: How did the “enhanced interrogation” technique of sleep deprivation come to depend on stress positions? Somehow, between 2002 and 2005, CIA interrogators began using what the International Committee of the Red Cross called “prolonged stress standing” as a means to keep detainees from falling asleep so as to make them docile and cooperative when questioned. What isn’t clear is how that non-intuitive sense of “sleep deprivation,” which was not mentioned in the initial legal authorization for the technique, came into official CIA usage.... But by the time the OLC reevaluated the CIA’s interrogation program in 2005, it revealed that the technique was overwhelmingly physical. “The primary method of sleep deprivation involves the use of shackling to keep the detainee awake,” wrote Bybee’s eventual replacement, Steven Bradbury, on March 10, 2005. “In this method, the detainee is standing and is handcuffed, and the handcuffs are attached by a length of chain to the ceiling.” The detainee’s feet are shackled to a bolt in the floor, giving him a “two-to-three-foot diameter of movement.” His hands “may be raised above the level of his head, but only for a period of up to two hours.” His weight is “borne by his legs and feet during sleep deprivation,” ensuring that he had to keep awake, for if he “los[t] his balance” from exhaustion he would feel “the restraining tension of the shackles.”

Both memos gave legal approval to the use of stress positions like shackling. And both memos contemplated and blessed the use of techniques in combination with each other, finding that no conceivable permutation of combined techniques would constitute “severe pain or suffering” or “severe mental pain or suffering.” But until the release of the 2005 memo, there had been no official acknowledgment that sleep deprivation as practiced by the CIA depended on physically restraining a detainee...

Today Greg Miller of the Los Angeles Times writes:

Memos shed light on CIA use of sleep deprivations: From the beginning, sleep deprivation had been one of the most important elements in the CIA's interrogation program, used to help break dozens of suspected terrorists, far more than the most violent approaches. And it is among the methods the agency fought hardest to keep.... Because of its effectiveness -- as well as the perception that it was less objectionable than waterboarding, head-slamming or forced nudity -- sleep deprivation may be seen as a tempting technique to restore.

But the Justice Department memos released last month by Obama, as well as information provided by officials familiar with the program, indicate that the method, which involves forcing chained prisoners to stand, sometimes for days on end, was more controversial within the U.S. intelligence community than was widely known. A CIA inspector general's report issued in 2004 was more critical of the agency's use of sleep deprivation than it was of any other method besides waterboarding, according to officials familiar with the document, because of how the technique was applied. The prisoners had their feet shackled to the floor and their hands cuffed close to their chins, according to the Justice Department memos....

"The position is sufficiently uncomfortable to detainees to deprive them of unbroken sleep, while allowing their lower limbs to recover from the effects of standing," it said....

The Justice Department memos also cited research that suggested sleep deprivation was not harmful. "Experience with sleep deprivation shows that 'surprisingly, little seemed to go wrong with the subjects physically,' " said the May 10, 2005, Justice Department memo -- one of many instances in which government lawyers cited scientific papers in asserting that the program was safe.

But some authors of those studies have since said that the conclusions of their research were grossly misapplied. James Horne, director of the Sleep Research Center at Loughborough University in Britain, said he was never consulted by U.S. officials and didn't know how his work was being used until the memos were released. "My response was shocked concern," Horne said in an e-mail interview. Just because the pain of sleep deprivation "can't be measured in terms of physical injury or appearance . . . does not mean that the mental anguish is not as bad."... "To claim that 180 hours is safe in these respects is nonsense," Horne wrote in a separate online posting. Even if sleep deprivation succeeded in getting prisoners to talk, he said, "I would doubt whether the state of mind would be able to produce credible information, unaffected by delusion, fantasy or suggestibility."

And here is the "separate online posting":

Hilzoy:

Obsidian Wings: Prof. James Horne On The Memos: When discussing sleep deprivation, the memos released last Thursday cite the work of Dr. James Horne in support of the claim that sleep deprivation for up to 180 hours is not torture. (See here, pp. 35-40.) I wrote to Dr. Horne and asked him whether he would like to respond to this use of his work. (He had given a statement to Zachary Roth at TPMMuckraker, but I thought he might like the opportunity to respond at greater length.) What follows is his response....

My book ‘Why We Sleep’ was written without any thought of ‘coercive techniques’ in mind. Nevertheless I made it very clear that pure sleep deprivation in otherwise happy healthy volunteers, as in laboratory settings without additional stresses, is not very eventful for the body, while it is much more so for our brain and behaviour. Whereas sleep helps people withstand stress, sleep loss makes us more vulnerable to other stresses, especially as the inherent sleepiness and other adverse effects on the brain confuse the mind’s ability to figure out how to deal with and avoid these stresses.  Thus I emphasise that my book’s conclusions were based on ‘pure sleep deprivation’ without additional stresses. Such findings were derived from otherwise undemanding and benign laboratory studies that do not typify the real world, whereas people are usually sleep deprived because of other stresses such as long and arduous working hours, family crises, etc. Healthy people who have volunteered for sleep deprivation experiments are usually well cosseted by their experimenters, perhaps too much so, and might have been inadvertently protected from the full effects of sleep loss.  Apart from the sleep deprivation, volunteers typically lead a tranquil existence, are fed very well and, except for having periodically to undergo various harmless tests, have plenty of time for relaxation, reading and watching TV. There have been many of these experiments with human volunteers, with the longest lasting 8-11 days.  Volunteers can pull out any time and there is full medical cover. The purpose of these studies has been to explore what sleep does for the body and brain, by removing sleep and see what happens. Under these circumstances, the ‘body’ copes well, whereas the brain and behaviour are obviously affected – not only by sleepiness but by more subtle changes whereby individuals can no longer think for themselves and become more like automatons.

With additional stresses as in ‘coercive techniques’, the situation for the sleep deprived victim becomes deplorable, as the mind and brain under these circumstances trigger the body’s defences to create a physiological ‘alarm reaction’ whereby, for example, various stress coping hormones are mobilised and prepare the body for possible trauma, even blood loss. I emphasise that this alarm reaction is not present under ‘pure sleep loss’ as I have just described.  Prolonged stress with sleep deprivation will lead to a physiological exhaustion of the body’s defence mechanisms, physical collapse, and with the potential for various ensuing illnesses.  We don’t know at what point this latter phase would be reached with ‘coercive techniques’, but to claim that 180 hours is safe in these respects, is nonsense.  Moreover, whereas physical pain may not be particularly apparent even at this stage, the mental pain would be all too evident, and arguably worse than physical pain.

Even if one was to be pragmatic and claim that this form of sleep deprivation produced ‘desired results’, I would doubt whether the state of mind would be able to produce credible information, unaffected by delusion, fantasy or suggestibility.

Whilst Bradbury’s memo acknowledges (p36) that, “We note that there are important differences between interrogation technique used by the CIA and the controlled experiments documented in the literature” – i.e. what I wrote might not be wholly applicable to ‘coercive techniques’, this key point was understated. I had no knowledge of this memo or its contents until a few days ago, and am both saddened and appalled that my book has been used in this way.

Jim Horne

Sleep Research Centre, Loughborough University, UK
20th April 2009

## Progress in Macroeconomics?

A decade ago, Olivier Blanchard, now IMF chief economist, wrote that there had been a lot of progress in macroeconomics since 1920:

What Do We Know that Fisher and Wicksell Did Not?: The answer to the question... is: A lot.... Pre 1940. A period of exploration.... From 1949 to 1980. A period of consolidation... an integrated framework was developed--starting with the IS-LM, all the way to dynamic general equilibrium models--and used to clarify the role of shocks and propagation mechanisms.... since 1980. A new period of exploration, focused on the role of imperfections... nominal price setting... incompleteness of markets... asymmetric information... search and bargaining in decentralized markets....

[...]

The right [picture] is one of a steady accumulation of knowledge.... [R]evolutionaries make the news... [their ideas are] discarded... bastardized, then integrated. The insights become part of the core....

[...]

Relative to Wicksell and Fisher, macroeconomics today is solidly grounded in a general equilibrium structure. Modrn models characterize the economy as being in temporary equilibrium, given the implications of the past, and the anticipations of th efuture. They provide an interpretation of shocks working their way through propagation mechanisms...

[...]

One way to end is to ask: Of how much use was macroeconomic research in understanding... the Asian crisis?... Macroeconomists did not predict either the time, place, or scope of the crisis.... [W]hen the crisis started, macroeconomic mistakes... were made. But fairly quickly the nature of the crisis was better understood, and the mistakes correcxted. And most of the tools needed were there.... since then, a large amount of further research has taken place, leading to a better understanding of the role of financial intermediaries in exchange-rate crisis...

Even then Paul Krugman snarked:

Paul Krugman recently wondered how many macroeconomists still believe in the IS-LM model. The answer is probably that most do, but many of them probably do not know it well enough to tell..

Today things look considerably different on the progress-in-macroeconomics front. John Quiggin:

Refuted/obsolete economic doctrines #7: New Keynesian macroeconomics at John Quiggin: [Here is] a new entry for my list of refuted economic doctrines... the target... has... [been] rendered obsolete by events... New Keynesianism an approach to macroeconomics, to which Akerlof and Shiller have made some of the biggest contributions, but which they have now... repudiated.... [T]he research task was seen as one of identifying minimal deviations from the standard [rational foresight, self-interest, and competiative markets] microeconomic assumptions which yield Keynesian macroeconomic conclusions.... Akerlof’s ‘menu costs’ arguments... are an ideal example of this kind of work. New Keynesian macroeconomics has been tested by the current global financial and macroeconomic crisis and has, broadly speaking, been found wanting. The analysis of those Keynesians who warned of impending crisis combined an ‘old Keynesian’ analysis of mounting economic imbalances with a Minskyan focus on financial instability.... [T]he policy response... has been informed mainly by old-fashioned ‘hydraulic’ Keynesianism... massive economic stimulus... large-scale intervention in the financial system. The opponents of Keynesianism have retreated even further into the past, reviving the anti-Keynesian arguments of the 1930s and arguing at length over policy responses to the Great Depression.

There is of course, still a need to explain why wages do not adjust rapidly to clear labour markets in the face of an external financial shock. But in an environment where the workings of sophisticated financial markets display collective irrationality on a massive scale, there is much less reason to be concerned about the fact that such an explanation must involve deviations from rationality, and seeking to minimise those deviations....

New Keynesianism... was a defensive adjustment to the dominance of free market ideas.... New Keynesians sought a theoretical framework that would justify medium-term macroeconomic management based on manipulation of interest rates by central banks, and a fiscal policy that allowed automatic stabilisers to work, against advocates of fixed monetary rules and annual balanced budgets. But now that both... the efficient markets hypothesis and the policy framework that brought us the Great Moderation have collapsed, there is no need for such a defensive stance...

George Akerlof and Robert Shiller agree with Quiggin rather than Blanchard:

Akerlof and Shiller, Animal Spirits: The economics of the textbooks seeks to minimise as much as possible departures from pure economic motivation and from rationality.... [E]ach of us has spent a good portion of his life writing in this tradition. The [self-interest and rational foresight-based] economics of Adam Smith is well understood. Explanations in terms of small deviations from Smith’s ideal system are thus clear because they are posed within a framework that is already very well understood. But that does not mean that these small deviations from Smith’s system describe how the economy actually works.... In our view, economic theory should be derived not from the minimal deviations from the system of Adam Smith but rather from the deviations [from competitive markets, self-interested motivation, and rational foresight] that actually do occur...

So does Greg Clark: his rant from his seat as chair of the U.C. Davis Economics Department:

Dismal scientists: how the crash is reshaping economics - The Atlantic Business Channel: In the long post WWII boom, as free market ideology triumphed, economists have won for themselves a privileged place inside academia.... [C]ash.... Not much by the pornographic standards of finance, but a fat paycheck compared to your average English or Physics professor. It is not just the stars.  Journeyman assistant professors in economics routinely come in at $100,000 or more... fresh from their PhDs, without a publication to their name and without years of low pay as post-docs. The high salaries have been accompanied by dramatic declines in the teaching burden.... Why did academic economics generate so much prestige?... [W]hat drove demand was the unquenchable thirst for economists by banks, government agencies, and business schools - the Feds, the Treasury, the IMF, the World Bank, the ECB. Economics had powerful insights to offer the world, insights worth a lot of treasure. Economics was powerful voodoo.... The current recession has revealed... as useless the mathematical contortions of academic economics. There is no totemic power.... (1) Almost no-one predicted the world wide downtown. Academic economists were confident that episodes like the Great Depression had been confined to the dust bins of history. There was indeed much recent debate about the sources of "The Great Moderation" in modern economies, the declining significance of business cycles.... [M]acroeconomists had turned their considerable talents to a bizarre variety of rococo academic elaborations. With nothing of importance to explain, why not turn to the mysteries of online dating, for example.... (2) The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner. The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years.... Bizarrely, suddenly everyone is interested in economics, but most academic economists are ill-equipped to address these issues. Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing the Obama's stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus -- thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that "all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone." Academic economics will no doubt survive this shock to its prestige.... [But] the days of the$500,000 economics professor may have passed.... [W]ill the focus of academic economics change?... I would rate the chances of Chrysler producing once again a competitive US automobile at least as high as the chances of academic economics learning any lesson from this downturn...

Watching the scrum over the past six months, I have to call this one for Krugman, Clark, Akerlof, Shiller, and Quiggin and against Blanchard's vision of growing knowledge and analytical convergence. Economists have been worrying about the industrial business cycle and the proper role of the government in trying to tame it since 1825. Yet there are an extraordinary number of people out there calling themselves macroeconomists who do not have the slightest clue as to what the issues have been over the past two hundred years.

## Arachne Jericho: How Iain M. Banks Ruined Me for Science Fiction, Epic Fantasy, and Low Fantasy

Arachne Jericho says, I think, that she should not have read Iain M. Banks's book Matter:

Review: Iain M. Banks’ Matter: On the nesting Matryoshka dolls of space-faring civilizations, philosophy a la Nietzsche, and how Banks ruined SF and epic fantasy at the same time for me. Matter is one of Banks’ loosely set Culture novels. As a rule they’re Big Idea tales that ruthlessly use mechanisms unique to science fiction to explore said ideas.... His world-building is more glorious and mind-bending than before, his ideas more encompassing and disturbing....

I made the mistake of getting attached to the plot threads, even though I knew ahead of time that, given the nihilistic theme that became more and more apparent, the collision of the two plots just could not end well. I don’t mind characters dying... but Banks didn’t just destroy characters, but entire plots....

After Matter, I devoured more Culture novels.... His books are excellent, exquisite in their handling of story. He’s one of the best writers out there, in any genre or mainstream. But his books are, in sincerity, not for me.... Banks made me despair of ever liking SF again. Any other book or story I attempted to read felt lifeless. I folded myself into the Dresden Files for two weeks after I discovered that I couldn't even stomach epic low fantasy anymore.

Well played, Banks. Your story stayed with me.

Ah. Iain M. Banks...

Remember: a Banks novel will be set in a galaxy-spanning space-traveling future, inhabited by super-intelligent robots with jokey names, show bizarre technological and natural marvels of enormous scale, involve fearful fanatic antagonists who cannot be reasoned with, contain do-gooders who leave a cornucopiac utopia to try to help the less-fortunate using whatever means are necessary. At the end those among the protagonists whom a malign fate has put at the end of the spear that might thwart the evil purposes of the antagonists will screw their courage to the sticking place, remember that the needs of the many outweigh the needs of the one, do what needs to be done, and die. Or maybe not, if Banks is feeling exceptionally generous. There is always hope--until the very last line. (And be sure to read beyond the Glossary...)

It is true that Banks should be read only be trained professionals. But if you are ready for a Banks novel, what a ride!

## Has Gary Becker Ever Met a Conservative? It Does Not Seem Likely

Gary Becker plays intellectual Calvinball with his definitions of both modern American and classical "conservatives." Edmund Burke would weep. Joseph de Maistre would weep. William F. Buckley would weep.

It is, I suppose, something to see:

The Serious Conflict in the Modern Conservative Movement: The roots of conservatism go back to philosophers of the 17 and 18th centuries, such as John Locke, David Hume, and Adam Smith.... They claimed further that making decisions for oneself and suffering the consequences were usually good for people, even when these decisions led to bad outcomes, because learning from one's own mistakes helps improve future choices.

Modern conservatism[']... support of competition and private markets, and hostility to sizable regulations, is a direct descendant of the classical liberal views.... Classical conservatism would recognize that the intervention of the Fed and Treasury in the finance sector may be necessary, given the crisis in that sector, but classical conservatives would look for this involvement to end as soon as possible.

The other pillars of modern conservatism are aggressive foreign policy to promote democracy in other countries, and government actions to further various social goals, such as fewer abortions or outlawing gay "marriage". These views fit less comfortably in the conservative tradition.... Classical conservatives would argue that governments are no more effective at interventions internationally or on social issues than they are on economic matters. So governments should usually not get involved....

[F]or parties to compete at the national level, or in other large political arenas, they have to put together coalitions of groups with different interests.... The Democratic Party is now fairly well united in the belief that governments frequently do better than private decision makers in both the economic and social spheres.... [T]he Republican Party under the leadership of Eisenhower and Reagan had a more consistent classical conservative philosophy of supporting private markets in the economy, little military involvement in other countries, and even little interference in social arrangements.... The shift in the attitudes of the Republican Party toward more interventionist views on social issues, and to some extent also on military involvement... has created this crisis in conservatism. Better stated, it has created this crisis in the conservatism of the Republican Party.

I believe that the best way to restore the consistency and attractiveness of the conservative movement is for modern conservatism to return to its roots of skepticism toward governmental actions....

Such a shift in attitudes would require more flexible approaches toward hot button issues like gays in the military, gay marriage, abortions, cell stem research, and toward many other issues of this type. It will not be easy for the Republican Party to emerge from the doldrums if it cannot embrace such a consistently skeptical view of government.

## Note to Self: Hash Table Collision

Must work harder to distinguish between Cosma Shalizi, Clay Shirky, and John Scalzi...

Also, must work harder to distinguish between Thurman Arnold, Arnold Palmer, Mitchell Palmer, and Wesley Mitchell...

My brain is full.

## Obama's First 100 Days

And the four timescales on which he must act:

• The three-year time-scale: the economic crisis.
• The fifteen-year time scale: the health cost crisis.
• The seventy-five-year time scale: the global power crisis.
• The 375-year time scale: the global climate crisis.

http://www.j-bradford-delong.net/2009_mov/20090507_100_days.m4a

## Department of "Huh?"

The usually excellent David Leonhardt appears to have confused himself. The job report was dismal taking its establishment and CPS components together.

Yet Leonhardt writes:

A Dreadful, Yet Encouraging, Jobs Report: By any objective standard, this morning’s jobs report was terrible. But it was also pretty encouraging...

Ummm... I'm speechless. It is not pretty encouraging.

Leonhardt goes on:

Job losses have now been slowing for three straight months.... [T]his morning’s news was, all things considered, reason for optimism. The economy shed 539,000 jobs last month — down from 699,000 in March, 681,000 in February and 741,000 in January. Before February, job losses had accelerated for six straight months.... Even the increase in the unemployment rate, to 8.9 percent from 8.5 percent, wasn’t as bad as it sounds. It was nearly all a shift of people from... not working and not looking for a job to official unemployment....

All in all, this was one of the worst jobs reports in the last 30 years. The monthly job loss was larger than in any month during the either the 2001 or 1990-91 recessions.... The job market is in its worst condition since the early 1980s, and it will still be getting worse for months to come.

It’s just not getting worse at an accelerating rate anymore, and that’s often a sign of better days ahead. We’ll take what little good news we can get these days.

## New Republic Crashed-and-Burned-and-Smoking Watch

The New York Times editorial board sends like a shrill weblogger as it discusses the Supreme Court and the New Republic's Jeffrey Rosen:

Choosing a New Justice - NYTimes.com: It has been a long time since a Democratic president has been able to fill a Supreme Court vacancy. The decision is especially delicate because the court is so closely divided. If Mr. Obama chooses someone who believes Roe v. Wade was wrong, for example, abortion rights could be lost for a generation. If he chooses someone who thinks campaign finance laws violate the First Amendment, the entire campaign finance regime could be struck down.

One reason that Judge Sotomayor, of the United States Court of Appeals for the Second Circuit in New York, is often mentioned is that, as a woman of Puerto Rican descent, she offers diversity. She would be the first Hispanic justice and would raise the number of women on the court back to two. She grew up in a Bronx housing project, and her father, a Spanish-speaking tool-and-die worker with a third-grade education, died when she was young. She graduated summa cum laude from Princeton and from Yale Law School. Diane Wood, a judge on the United States Court of Appeals for the Seventh Circuit in Chicago — who, like the president, has taught at the University of Chicago Law School — is another strong candidate.... Jennifer Granholm... Elena Kagan... Harold Hongjuh Koh....

Supreme Court... political fights... generally... begin when a candidate is picked. This time, the attacks have already begun, many aimed at Judge Sotomayor and beyond the pale of reasonable debate. She is being called insufficiently intellectual despite her stellar academic credentials. Her temperament is being assailed, generally by anonymous detractors.... Conservatives also have been attacking some of the potential nominees for being gay, possibly gay, or “gay friendly.” At a time when states such as Iowa and Maine are legalizing same-sex marriage, Mr. Obama should not be deterred. Adding a gay justice would make the court more fully representative of the nation....

President Obama... should ignore the uninformed and mean-spirited chattering and select the best person for the job.

## Washington Post Crashed-and-Burned-and-Smoking Watch (More George F. Will)

Why oh why can't we have a better press corps?

Steve Benen:

The Washington Monthly: George Will just can't seem to stay away from environmental policy, no matter how much trouble it gets him in. On Sunday, Will argued on ABC's "This Week" that Toyota's Prius is only affordable because the company "sells it at a loss, and it can afford to sell it at a loss because it is selling twice as many gas-guzzling pickup trucks of the sort our president detests." The conservative pundit liked the observation so much, he repeated it in his Washington Post column today.

[Obama] says: "If the Japanese can design [an] affordable, well-designed hybrid, then, doggone it, the American people should be able to do the same." Yes they can -- if the American manufacturer can do what Toyota does with the Prius: Sell its hybrid without significant, if any, profit and sustain this practice, as Toyota does, by selling about twice as many of the gas-thirsty pickup trucks that the president thinks are destroying the planet.

Will already seems to be backpedaling, at least a little. On Sunday, Toyota sold every Prius at a loss. On Thursday, Toyota sells every Prius "without significant, if any, profit." What constitutes a "significant" per-sale profit? Will doesn't say. We talked a bit yesterday about Will's latest error, but this item helped explain the facts in additional detail.

By George, Toyota and independent analysts say the Prius is a money maker for Toyota, and it has been since 2001. As we noted last week, Toyota and Honda, though both struggling in the recession, are making about 300,000 yen (US$3,100) on each hybrid they sell, a number similar to what they are making on gasoline-only cars, according to Japan's Nikkei. The Nikkei adds that "Toyota appears to have earned gross profits of around 100 billion yen (US$1 billion) on its sales of second-generation Prius hybrids last year." And in spite of the recession, pre-orders are rolling in for the third generation, solar-roof-optional, 50-MPG 2010 Prius hybrid.

For years, the research and development costs that Toyota poured into its flagship hybrid car had kept it from earning true profits, something that it sought to quietly play down. While the company still doesn't reveal exact figures, financial analysts have backed up the company's claims. But as Mike pointed out recently, "since [R&D] can be spread over many vehicles, over a long period of time, and since it can help automakers future-proof (a lot of hybrid tech will probably be useful in plug-in hybrids and electric cars), it would probably cost more not to make those investments." [...]

Ultimately, the Japanese automakers profits from hybrid cars can't be completely verified. But that doesn't mean they aren't making profits -- and evidence suggests they are, and increasingly so.

Maybe Will should stick to baseball?

## Reason Needs to Take Out the Garbage...

UPDATE: Michael C. Moynihan shows up in the comments section to object.

Unfortunately, it's not clear what he is objecting to. He appears to say that spying on Hitler is bad--or at least that my presumption that "anti-Nazism justifies espionage" is false. I, by contrast, think that spying on Hitler is a good thing to do.

Tell me what you think he is saying here:

Grasping Reality with Both Hands: Reason Needs to Take Out the Garbage...: This really scurrilous stuff, Brad. (I am pro-Nazi garbage????? Really???). Besides not addressing any of my criticisms, you willfully (or lazily) misread me. The "helping" the Soviets defeat fascism refers NOT--I repeat NOT--to the United States, but to I.F. Stone and 1) the presumption that this is what motivated his espionage work and 2) that anti-Nazism justifies espionage. Obviously, I reject the idea that Izzy was motivated simply by a desire to defeat Hitlerism. Besides, Stone's work for Moscow began, according to Klehr and Haynes, in 1936--five years before the German invasion of the Soviet Union. Either way, I addressed most of this in the original post and if your readers decide to click the link, rather than relying on your amazingly disingenuous summary of my point, I suspect they will see what I mean.

And there is more: "Besides," he writes "[I.F.] Stone's work for Moscow began... in 1936--five years before the German invasion of the Soviet Union..."

Michael C. Moynihan:

Hit & Run: Reason Magazine: Since historians John Earl Haynes, Harvey Klehr, and Alexander Vassiliev revealed that their forthcoming volume Spies: The Rise and Fall of the KGB in America (Yale University Press) would contain archival documentation linking journalist I.F. Stone to the Soviet intelligence apparatus (cover name: "Pancake"), many of Izzy's acolytes have intervened on behalf of their hero.... Now along comes UC Berkeley economist Brad DeLong to claim that, while he might have worked with the Soviets, Stone should be considered a "premature anti-fascist," and that "helping Stalin against Hitler is a mitzvah"...

Well, helping Stalin and the Russians against Hitler and the Nazis was a mitzvah.

I really, really don't think Reason needs to print people who wish that the Nazis had conquered Moscow in 1941.

Just saying.

UPDATE: National Review too appears to have contributors who think we fought on the wrong side in World War II in joining Stalin rather than Hitler:

RE: More on the Left's Cultural Amnesia: Mark Hemingway: Earlier today, I noted in passing Brad DeLong's incredibly weak defense of I.F. Stone against well-documented assertions that he was a Soviet spy. I didn't have the time or energy to unpack DeLong's argument and deal with how spectacularly wrong it was, but fortunately Michael Moynihan has taken the ball from me, run with it and is now in the end zone doing the anti-communist equivalent of the Ickey Shuffle.

For Reason this is really surprising--I had thought better of them. National Review is more expected.

As I wrote before: You can sense William F. Buckley more than half-wishing he could have played his part in Franco's righteous fight against the grotesque democratic regime of Republican Spain--perhaps by piloting a Ju-87 in the Condor Legion?

October 26, 1957: General Franco is an authentic national hero... [with the] talents, the perseverance, and the sense of the righteousness of his cause, that were required to wrest Spain from the hands of the visionaries, ideologues, Marxists, and nihilists that were imposing... a regime so grotesque as to do violence to the Spanish soul, to deny, even, Spain's historical destiny. He saved the day.... The need was imperative... for a national policy [to]... make this concession to Churchill this morning, that one to Hitler this afternoon.... Franco reigns... supreme. He is not an oppressive dictator.... only as oppressive as is necessary to maintain total power...

March 9, 1957: Franco is a part, and an integral part, of Western civilization... [the] convergence of the multifarious political philosophical, religious, and cultural tendencies that have shaped Spanish history... the man to whom the Spanish people look--as the Chinese have looked to Chiang [Kaishek], for all his faults--for leadership.

There's still a chance to take out the garbage, guys!

## Jeffrey Rosen Throws New Republic Editor Frank Foer Under the Bus!

Jeffrey Rosen:

've just returned from London to find that my piece on Sonia Sotomayor has provoked an energetic response in the blogosphere. Many people have mischaracterized my argument, and I can understand why. The headline--"The Case Against Sotomayor"--promised something much stronger than I intended to deliver. As soon as the piece was published, I regretted the headline, which I hadn't seen in advance....

I concluded the piece not by suggesting that Sotomayor was unqualified for the Supreme Court, but by suggesting that "given the stakes, the president should obviously satisfy himself that he has a complete picture...".

If the piece had a less provocative headline, perhaps it would have been clearer that that I wasn't presuming to make a definitive judgment, but to encourage the White House to weigh considerations of temperament against the many other factors they'll be considering...

And Rosen's bottom line:

Sotomayor is an able candidate--at least as able as some of the current Supreme Court justices--and if Obama is convinced she is the best candidate on his short list, he should pick her...

Why oh why can't we have a better press corps?

## Notes for Econ 210a: May 6, 2009: The Great Divergence

Start with Marx:

Karl Marx (1853),"The Future Results of British Rule in India," New York Daily Tribune (August 8): The political unity... imposed by the British sword, will now be strengthened and perpetuated by the electric telegraph. The native army, organized and trained by the British.... The free press.... From the Indian natives... educated at Calcutta under English superintendence, a fresh class is springing up, endowed with the requirements for government and imbued with European science. Steam has brought India into regular and rapid communication with Europe.... The day is not far distant when... the distance between England and India, measured by time, will be shortened to eight days, and when that once fabulous country will thus be actually annexed to the Western world....

[N]ow the ... millocracy have discovered that the transformation of India into a reproductive country has become of vital importance... [and] it is necessary... to gift her with means of irrigation and of internal communication. They intend now drawing a net of railroads over India....

I know that the English millocracy intend to endow India with railways with the exclusive view of extracting at diminished expenses the cotton and other raw materials.... But... [y]ou cannot maintain a net of railways... without introducing all those industrial processes necessary to meet the immediate and current wants of railway locomotion, and out of which there must grow the application of machinery to those branches of industry not immediately connected with railways. The railway-system will therefore become, in India, truly the forerunner of modern industry... the capacities and expertness of the native engineers in the Calcutta mint... the natives attached to the several steam engines in the Burdwan coal districts.... Mr. Campbell himself... is obliged to avow “that the great mass of the Indian people possesses a great industrial energy, is well fitted to accumulate capital, and remarkable for a mathematical clearness of head and talent for figures and exact sciences.” “Their intellects,” he says, “are excellent.”

Modern industry, resulting from the railway system, will dissolve the hereditary divisions of labor, upon which rest the Indian castes.... All the English bourgeoisie may be forced to do will neither emancipate nor materially mend the social condition of the mass of the people.... But what they will not fail to do is to lay down the material premises for both. Has the bourgeoisie ever done more? Has it ever effected a progress without dragging individuals and people through blood and dirt, through misery and degradation?...

The bourgeois period of history has to create the material basis of the new world... universal intercourse... the transformation of material production into a scientific domination of natural agencies. Bourgeois industry and commerce create these material conditions.... When a great social revolution shall have mastered the results of the bourgeois epoch, the market of the world and the modern powers of production, and subjected them to the common control of the most advanced peoples, then only will human progress cease to resemble that hideous, pagan idol, who would not drink the nectar but from the skulls of the slain...

What went wrong?

Lant Pritchett, "Divergence, Big Time":

Lewis: The Evolution of the International Economic Order:

"How did the world come to be divided into industrial countries and agricultural countries?"

rodrik: Getting Interventions Right: How Korea and Taiwan Grew Rich:

Neocolonial origins of economic development:

Role of the Cold War in Asia?

## Republicans: The Stupid Party

I have said it before and I will say it again: no member of any university has any business being a Republican. I'll make it stronger: every member of every university has a strong positive moral duty to do whatever he or she can to undermine and transform the Republican Party.

Satyam Khanna watches the train wreck that is Michael Pence (R-IN):

Think Progress: Pence: I’m Not ‘Anti-Science’... But I Don’t Believe In Global Warming, Stem Cell Research, Or Evolution: Last month, House Minority Leader John Boehner (R-OH) announced the creation of the House GOP American Energy Solutions Group, which will “work on crafting Republican solutions to lower energy prices for American families and small businesses.” Undermining the seriousness of the task force, the GOP announced that it was appointing climate change denier Rep. Michele Bachmann (R-MN) to the group. Another member of the organization is Rep. Mike Pence (R-IN). In a contentious debate with MSNBC’s Chris Matthews today, the third-ranking House Republican claimed that the science behind climate change is “mixed.” Pence did, however, admit that it is “fair” to question whether that makes him a discredited messenger on energy issues:

PENCE: Well let me tell you. I think the science is very mixed on the subject of global warming, Chris.

Q: Then why should your party believe you’re going to get serious about it, if you say the science is mixed?

PENCE: Yeah, it’s a fair question. But look. I’m all for clean air. I’m all for clean coal technology. I’m sure reducing CO2 emissions would be a positive thing.

“In the mainstream media, there is a denial of the growing skepticism in the scientific community on global warming,” Pence bellowed.... It’s unclear what “growing skepticism” on man-made climate change Pence is seeing. But his anti-science tirade was just beginning. Pence then defended his party’s opposition to embryonic stem cell research, falsely claiming there were alternatives that “obviated” the need for embryonic research. And when Matthews pressed Pence on whether he believes in evolution — an undeniable fact and the foundation of biology — Pence said he believes in creationism:

PENCE: Uh, do I believe in evolution? I embrace the view that God created the Heavens and the Earth, the Seas and all that’s in them. The means that he used to do that, I can’t say, but I do believe in that fundamental truth.

“Did you take biology in school?” asked an incredulous Matthews. “If your party wants to be credible on science, you gotta accept science. … I don’t think your party is passionately committed to science, or fighting global warming, or dealing with the scientific facts we live with.”

“Tell me what you really think, Chris,” Pence retorted. “This anti-science thing is a little bit weak.”

## Tyler and Alex's Big Adventure

It is a Principles of Economics book. I want one:

Marginal Revolution: How our macro book differs: Alex already has suggested some points related to economic growth; I'll add to that:

1. We make macroeconomics as intuitive as microeconomics.  Our macro is based on the idea of incentives, consistently applied.

2. We cover the current financial crisis.

3. We show a simple -- yes truly simple -- way of teaching the Solow Growth model.  I call it Really Simple Solow.  But if that's not simple enough for you, you can skip it and just call it Long-Run Aggregate Supply.

4. We offer equal and balanced coverage of neo Keynesian and real business cycle models.  Most other texts emphasize one or the other.

5. We offer an intuitive way of teaching real business cycle theory.  No intertemporal optimization representative agent models.  Can you explain to your grandmother why swine flu has been bad for the Mexican economy?  If so, you also think that real business cycle theory can be taught simply and intuitively.

6. Our version of the AD-AS model actually makes sense.  We don't mash together real and nominal interest rates into the same diagram, we don't treat the Taylor rule as an assumption for deriving an AD curve, and we do the analysis consistently in terms of dynamic rates of change.  (On the latter point for instance it is the rate of inflation which influences economic behavior, not the absolute level of prices per se, yet so often "p" rather than "pdot" goes on the vertical axis.) The AD-AS analysis covers both neo Keynesian and RBC models and can be done with three simple curves in one simple graph.  There is only one (consistent) model which needs to be taught for presenting the major macro ideas.

Alex and I vowed we would not stop working on this book until macro ceased to be the "ugly sister" of the micro/macro pair.  Modern Principles: Macroeconomics is the result of that Auseinandersetzung.

## Cryptic Note to Self: I Will Never Understand Chicago Today...

"But monetary policy can still be very effective: you just have to buy things other than Treasury bonds in your open-market operations..."

So you grow the money stock: what does that do? Unless your expansionary monetary policy raises short-term interest rates--in which case it is not what I at least think of as expansionary monetary policy--it moves you by the little red line--and it creates a huge excess demand-inflation problem whenever interest rates return to their normal (black) levels as shown by the big black arrow.

By contrast, fiscal policy--or perhaps flow-of-funds policy: fiscal and banking policy--that sops up the flow of savings and raises short-term safe nominal interest rates gets you quickly to the blue arrow--with no long-run monetary-overhang problem to produce a big burst of inflation later.

More to follow...

## Nunc Dimittis: Interest Rate Spreads Narrow

OK: Now I am happy. Now I see "green shoots".

David Oakley in the FT:

Libor hits record low as credit fears ease: London interbank money market rates – the amount banks charge to lend to each other – fell to record lows on Tuesday in a further sign that the credit markets are thawing. The key three-month lending rates for the dollar fell below 1 per cent for the first time. The previous all-time low was 1 per cent in June 2003. The fall in the Libor rates is a key sign of revival in financial markets. It suggests confidence among investors is growing and that the global economy is past the worst of the financial crisis. This confidence has also been reflected in the sharp rise in the equity markets, which are about 20 per cent higher since their lows in early March.

Significantly, the three-month euro and dollar and Libor spreads over market overnight interest rates – considered a pure measure of credit risk – have fallen to their lowest levels since Lehman Brothers collapsed in September. Don Smith, economist at inter-dealer broker Icap, said: “Conditions are improving with some signs of confidence coming back to the market.” However, he warned: “We have to remember, we are still nowhere near back to the strength of activity we saw before the credit crisis. It is still a desert for unsecured lending beyond three months.” Dollar Libor for three-month money jumped to 4.82 per cent following the collapse of Lehman in September. It has fallen steadily this year, helped by the US Federal Reserve’s near-zero interest rate policy and fiscal stimulus programmes to boost the economy and bail-out the beleaguered banks. Euro and sterling Libor rates for three-month lending have also steadily fallen this year, helped by the Bank of England and European Central Bank cutting base rates to historic lows in the past two months. The record low dates back to 1984 when the British Bankers Association began a trial period for its Libor settings; official BBA rates began on January 1, 1986.

The fall in the cost of Libor is important as the rates are used as a reference to price billions of dollars of mortgages, loans and corporate bonds. The rate, set by the British Bankers’ Association in London, determines borrowing costs on about \$360,000bn of products worldwide, according to Bloomberg data. Three-month dollar Libor on Tuesday fixed at 0.98 per cent, three-month euro Libor fixed at 1.34 per cent and three-month sterling Libor fixed at 1.43 per cent...

The U.S. Treasury-Eurodollar spread: