Bureau of Labor Statistics” Employment Situation Summary “In September, the unemployment rate declined…

…by 0.2 percentage point to 5.9
percent…. The civilian labor force participation rate, at 62.7 percent, changed little…. The employment-population ratio was 59.0 percent for the fourth consecutive month…. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in September at 7.1 million…. 2.2 million persons were marginally attached to the labor force, essentially unchanged from a year earlier….

Total nonfarm payroll employment rose by 248,000 in September, compared with an average monthly gain of 213,000 over the prior 12 months…. The average workweek for all employees on private nonfarm payrolls
edged up by 0.1 hour to 34.6 hours…. The average
workweek for production and nonsupervisory employees on private nonfarm payrollsedged down by 0.1 hour to 33.7 hours…. Average hourly earnings for all employees on private nonfarm payrolls, at $24.53,
changed little in September….

The change in total nonfarm payroll employment for July was revised from +212,000 to +243,000, and the change for August was revised from +142,000 to +180,000. With these revisions, employment gains in July and August combined were 69,000 more
than previously reported…

I believe that, counting revisions, this is the fourth-best monthly establishment employment game performance of this recovery, exceeded only by the April to May 2010 jump, the March to April 2011 jump, and the December 2011 to January 2012 jump. The big lesson is that the fact that this is a strong relative report in this recovery underscores how weak the recovery has been. The little lesson is that we may be, finally, on a track to see recovery of the employment-to-population ratio to where it demographically should be.

…late, just ending a dream about how you run into Warren Buffett and Charlie Munger at the Pilot Travel Center truckstop on I-29 in Council Bluffs. They then buy you beer for two hours and tell you everything they know about how asset pricing works in the real world. When you wake up, you hasten to write it all down. But because you woke up late you have to rush to the gym, and by the time gym finishes it’s all gone…

Hopefully not an omen for the weekend…

Financial Times: ECB’s Mario Draghi and his misguided malcontents: “Two years ago, Mario Draghi pledged to do ‘whatever it takes’ to save the euro…

…to use the full monetary policy arsenal to revive the stalling eurozone economy. On Thursday, the European Central Bank president primed his latest weapon…. Yet misguided opposition from inside and outside the bank continues to prevent him firing at will. His colleagues should pass him the ammunition and move out of his way…. The feeble eurozone recovery has stalled. The inflation rate in the currency area is down to 0.3 per cent and the core economies of Germany, France and Italy are at or close to standstill…. Mr Schäuble is not wrong to emphasise the need for structural reform within eurozone economies, but liberalisation and asset purchases are complements…. Reality must at some point impinge upon the monetary theocrats: the threat of outright deflation in the eurozone is not a sign of rising competitiveness–it is a menace…. Since the onset of the eurozone sovereign debt crisis in 2010, the standard pattern has been to do the right thing between six and 18 months too late, the delay generally originating in Frankfurt or Berlin. Now is another opportunity to ditch faulty analysis and wrong-headed policy and arrest deflation before it takes hold. Mr Draghi has shown the right instincts since he took over the ECB presidency. Those critics who have been proved wrong again and again in the eurozone crisis should stop standing in his path.

My bet with Noah Smith:

“IF at any time between 7/28/2012 and 7/28/2015 core consumer prices…

…as recorded in the FRED database series CPILFESL, are up more than 5% in the preceding 12 months, and if over the same 1-year period monthly U3 unemployment (as recorded in FRED database series UNRATE) has not averaged below 6%:

THEN Brad DeLong agrees to buy Noah Smith one dinner at Zachary’s Pizza at 1853 Solano Ave. in Berkeley CA, and to pay Noah 49 times the cost–including tax but excluding tip–of Noah’s meal at Zachary’s in Federal Reserve notes, or in alternative means of payment accepted by Zachary’s should Zachary’s Pizza no longer be accepting Federal Reserve notes at the date of the dinner.

This cost will be assessed as the total cost of the dinner to all, divided by the number of people present, regardless of how much pizza is consumed by or how much alcohol is drunk by specific individuals. If however, the above condition is not satisfied, Noah agrees to buy Brad one dinner at Zachary’s.

Miles Kimball will be the judge in charge of refereeing the bet. The decisions of the judge will be final and unappealable.

Furthermore, Noah’s brave and gracious willingness to take the John Cochrane-Argentina side of this bet at odds of only 50-1 will not be construed as a statement of his confidence in or of his support for any economist or position of economic analysis that judges expansionary fiscal policy at the zero lower nominal interest rate bound to be “insane”, or that judges “1932” to currently be a less dire risk for the U.S. than “Argentina”.

In retrospect, given Bernanke’s unwillingness to split the FOMC over policy, it was grossly unfair of me to give Noah only 50-1 odds:

We now have only ten more data points to see before the bet expires, and the last two data points are now in the average that must be over 5.0%/year for Noah to win. Annualized, the two data points we have are: July: 1.2%/year; August: 0.9%/year. The ten remaining data points must thus average more than 5.8%/year for Noah to win his bet.

And, as I said before, the question remains of what wine we should brown-bag to Zachary’s: I am partial to a Chateau Mouton myself, but perhaps better values are had in Haut Medocs or in Francis Ford Coppola’s Archimedes, and we could always invite Paul Ryan to come to learn some real economics and drink an Échezeaux, if we felt like following the taste of the House of Valois-Burgogne rather than the House of Plantagenet, and going for wines descended from the Burgundy served to Duchesse Marie la Riche rather than from the Bordeaux served to King Edward IV…

But perhaps the most interesting thing I learn today about my bet with Noah is this: A bunch of the people whose astonishing unwisdom originally provoked it are not marking their beliefs to market and hedging, but rather doubling down:

Caleb Melby, Laura Marcinek and Danielle Burger: Fed Critics Say ’10 Letter Warning Inflation Still Right: “Signatories of a letter sent to then-Federal Reserve Chairman Ben S. Bernanke in 2010…

…are standing by their claims… that the Federal Reserve… risked “currency debasement and inflation”… “distort[ed] financial markets”….

Jim Grant….

I think there’s plenty of inflation–not at the checkout counter, necessarily, but on Wall Street… at the expense of other things, including the people who saved all their lives and are now earning nothing on their savings….

John Taylor…

inflation, [un]employment… destroy[ed] financial markets, complicate[d]… normaliz[ation]… all have happened….

Douglas Holtz-Eakin….

The clever thing… is never give a number and a date. They are going to generate an uptick in core inflation…. I don’t know when, but they will.

Niall Ferguson… saying his thoughts haven’t changed….

This bull market has been accompanied by significant financial market distortions, just as we foresaw. Note that word ‘risk.’ And note the absence of a date. There is in fact still a risk of currency debasement and inflation.

David Malpass….

The letter was correct”….

Amity Shlaes….

Inflation could come… the nation is not prepared….

Peter Wallison…

All of us… have never seen anything like what’s happened here. This recovery… by far the slowest… in the last 50 years.

Geoffrey Wood…

Everything has panned out…. If the Fed doesn’t ease money growth into it, inflation could arrive.

Richard Bove…

Someone’s got to prove to me that inflation did not increase in the areas where the Fed put the money….

Cliff Asness… declined to comment. Michael Boskin… didn’t immediately respond…. Charles Calomiris… was traveling and unavailable…. Jim Chanos… didn’t return a phone call or an e-mail…. John Cogan… didn’t respond…. Nicole Gelinas… didn’t respond…. Phone calls… and an e-mail… to Kevin A. Hassett… weren’t returned. Roger Hertog… declined to comment…. Gregory Hess… didn’t immediately return…. Diana DeSocio… said Klarman stands by the position…. William Kristol… didn’t immediately return a call…. Ronald McKinnon… died yesterday prior to a Bloomberg call…. Dan Senor… didn’t respond…. Stephen Spruiell… declined to comment…

I am sorry that I will never learn what Ron McKinnon would have said–the last time I talked to him, at the San Francisco Fed, he said he was working on some ideas about why and where the enormous money-printing by the Fed had been soaked up.

And I do not know which is worse and less professional:

• Asness, Boskin, Calomiris, Chanos, Cogan, Gelinas, Hassett, Hertog, Hess, Klarman, Kristol, and Spruiell; who stand mute.

• Grant, Taylor, Ferguson, Malpass, and Wood, and Bove; who claim that the letter’s warnings were prescient: “The letter mentioned several things… inflation, employment… destroy financial markets, complicate the Fed’s effort to normalize… and all have happened…”

• Holtz-Eakin, Shlaes, and Ferguson (again); who claim it was always the “there are risks!” con: “The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will.”

The only one who emerges from this with any credit at all is Peter Wallison:

• Wallison: “All of us, I think, who signed the letter have never seen anything like what’s happened here. This recovery we’ve had since the end of 2009 has been by far the slowest we’ve had in the last 50 years…”

But even he gives no further reflections on why the clear and present economic dangers and imminent economic threats he saw back then have shown no signs at all of any existence.

My take: Mark your beliefs to market, people! Learn from history, people! As George Santayana said: “Those who do not remember the past are condemned to repeat it.” You can argue that that is a form of justice for you. But it is not a form of justice for us–because your amnesia dooms us to repeat the bad parts of it with you sometime in the future.

Ta-Nehisi Coates (2012): We Are All Welfare Queens Now: “Thinking some more on Mitt Romney’s high-handed claim…

…that one in two Americans will vote for Obama simply to better ensure their own sloth, I was reminded of Lee Atwater’s famous explanation of the Southern Strategy: ‘You start out in 1954 by saying, “Nigger, nigger, nigger.” By 1968 you can’t say “nigger”…. So you say… forced busing, states’ rights…. You’re getting so abstract… talking about… economic things and a byproduct of them is [that] blacks get hurt worse than whites…. If it is getting that abstract, and that coded, that we are doing away with the racial problem one way or the other… a hell of a lot more abstract than “Nigger, nigger.”‘… I think what’s often missed in analyzing these tactics is how they, themselves, are evidence of progress and the liberal dream of equal citizenship before the law…. As tactics aimed at suppressing black citizenship become more abstract, they also have the side-effect of enveloping non-blacks…. At each interval the ostensible pariah grows, until one in two Americans are members of the pariah class…. When the party of white populism finds itself writing off half the country, we are really close.

Jared Bernstein: How the Jobless Rate Underestimates the Economy’s Problems: “Why not just look at the unemployment rate and call it a day?…

…Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it’s within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent…. First, there are over seven million involuntary part-time workers… up two percentage points from its pre-recession trough… the unemployment rate doesn’t capture this dimension of slack at all…. Second… participation…. Economists have scurried about trying to figure out how much of the three-percentage-point decline in the labor force participation rate… to attribute to… structural… factors…. Jan Hatzius… another 1.6 million people worth of slack…

Must- and Shall-Reads:

• Mark Zandi: Job creation key to economic comeback

1. Paul Krugman: The Pimco Perplex: “Why was Gross betting so heavily against Treasuries? Brad DeLong tries to rationalize Gross’s behavior in terms of a coherent story about an impending U.S. recovery, which would lift us out of the liquidity trap. But Gross wasn’t saying anything like that. Instead, he was claiming that the Fed’s asset purchases–QE2–were holding rates down, and warned that the impending spike in rates when QE2 ended would derail recovery. So why did he believe all that? It all comes down, I’d argue, to liquidity trap denial. Since 2008 the basic logic of the economic situation has been that the private sector is trying to run a huge surplus, and the public sector isn’t willing to run a corresponding deficit…. A lot of people–politicians, of course, but also a lot of people in finance–have just refused to accept this account…. You might think the failure of higher rates to materialize, year after year, would cause them to reassess…. Instead, however, many of them made excuses. Above all, the big excuse was that rates would have gone higher if only the Fed weren’t buying up the stuff…. You can see why I found Gillian Tett’s apologia for Gross–that he was blindsided by central bank intervention–frustrating. For one thing, that’s accepting a model that has failed with flying colors; but beyond that, Gross’s really bad call was almost exactly the opposite, his claim that rates would soar when the Fed’s intervention ended…. Finance people seem weirdly determined to believe in a macro canon whose hold on their perceptions appears to be completely unbreakable, no matter how much money it causes them to lose.”

2. Robin Greenwood, Samuel Hanson, Joshua Rudolph, and Lawrence Summers: Government Debt Management at the Zero Lower Bound: ”Responding, Larry Summers said, in Binyamin Applebaum’s summary, that “his opponents… [were] ‘central bank independence freaks’ and… [that] it was ‘at the edge of absurd’ to suggest that debt management coordination would substantially erode the Fed’s independence.”

3. Paul Krugman: Ordoarithmetic: “Francesco Saraceno is furious and dismayed at Hans-Werner Sinn, who says among other things that deflation in southern Europe is necessary to restore competitiveness. Why not inflation in Germany, he asks? But Saraceno fails to understand German logic here. As they see it, their economy was in the doldrums at the end of the 1990s; they then cut labor costs, gaining a huge competitive advantage, and began running gigantic trade surpluses. So their recipe for global recovery is for everyone to deflate, gaining a huge competitive advantage, and begin running gigantic trade surpluses. You may think there’s some kind of arithmetic problem here, but in Germany they have their own intellectual tradition.”

4. Alice Chen et al.: Why is Infant Mortality Higher in the US than in Europe?: “The US has a substantial – and poorly understood – infant mortality disadvantage relative to peer countries. We combine comprehensive micro-data on births and infant deaths in the US from 2000 to 2005 with comparable data from Austria and Finland to investigate this disadvantage. Differential reporting of births near the threshold of viability can explain up to 40% of the US infant mortality disadvantage. Worse conditions at birth account for 75% of the remaining gap relative to Finland, but only 30% relative to Austria. Most striking, the US has similar neonatal mortality but a substantial disadvantage in postneonatal mortality. This postneonatal mortality disadvantage is driven almost exclusively by excess inequality in the US: infants born to white, college-educated, married US mothers have similar mortality to advantaged women in Europe. Our results suggest that high mortality in less advantaged groups in the postneonatal period is an important contributor to the US infant mortality disadvantage.”

5. Dan Davies: Bedtime for market efficiency: “People have been calling on the economics profession to make some fairly serious revisions to the way the subject is taught…. I think there’s one thing that really can’t be denied: when this particular phoenix rises from the flames, it ought to leave the Efficient Markets Hypothesis back in the ash pit…. Efficient markets gets a chapter of its own in John Quiggin’s Zombie Economics as an idea that won’t go away, no matter how thoroughly it’s refuted…. The temptation will be to try and avoid going “cold turkey” on efficient markets, by reducing the overarching claims, but hanging on to the general story that markets are ‘broadly efficient’…. The hypothesis that there is no information in the past history of share prices which can be used to predict the future… doesn’t work…. Companies like AQR have been offering funds based on them, and generally outperforming, for ages. And when you get to anything stronger than the very-weak form versions, the performance is really quite embarrassing. Robert Shiller’s share of the Nobel Prize was for noticing that securities prices are, in general, much too volatile to make sense as forecasts…. DeLong, Summers, Shleifer & Waldmann have shown that there is no real theoretical basis to the idea that ‘traders competing against each other make markets efficient’–it’s just as likely that they create meaningless volatility. Market prices are… a weighted average of the views of a large group of well-resourced and intelligent people with an incentive to get things right. But nobody would build a theory of politics around the infallibility of opinion polls…. All that’s really left of market efficiency is a sort of woolly idea that ‘it’s difficult to make money in the stock market’. Which it is, but it’s pretty difficult to make money in any other way too, a fact which has fewer implications for fundamental economic truth than you’d think…”

Should Be Aware of:

• Justin Fox: Understanding China’s Hard Line on Hong Kong

1. Carl Zimmer: The Evolution of Sleep: 700 Million Years of Melatonin: “When the sun sets, the encroaching darkness sets off a chain of molecular events spreading from our eyes to our pineal gland, which oozes a hormone called melatonin into the brain. When the melatonin latches onto neurons, it alters their electrical rhythm, nudging the brain into the realm of sleep. At dawn, sunlight snuffs out the melatonin, forcing the brain back to its wakeful pattern again…. Scientists have long wondered how this powerful cycle got its start. A new study on melatonin hints that it evolved some 700 million years ago…. Maria Antonietta Tosches and her colleagues examined how different genes became active in the worm larvae. They discovered that some cells on the top of the larvae make light-catching proteins–the same ones we make in our eyes to switch melatonin production on and off. These same cells also switch on genes required to produce melatonin…. They found that the worms didn’t produce melatonin all the time. Instead, they made it only at night, just as we do…. When it comes to melatonin, humans and worms are so similar that they can both get jet lag…”

2. David Glasner: Explaining the Hegemony of New Classical Economics: “Instead of pursuing microfoundations as an explanatory strategy, the New Classicals chose to impose it as a methodological prerequisite. A macroeconomic model was inadmissible unless it could be explicitly and formally derived from the optimizing choices of a fully rational agent…. Instead of using microfoundations as a method by which to make macroeconomic models conform more closely to the imperfect and limited informational resources available to actual employers deciding to hire or fire employees, and actual workers deciding to accept or reject employment opportunities, the New Classicals chose to use microfoundations as a methodological justification for the extreme unrealism of the rational-expectations assumption…. Some parts of chemistry have been reduced to physics, which is a good thing, especially when doing so actually enhances our understanding of the chemical process and results in an improved or more exact restatement of the relevant chemical laws. But it would be absurd and preposterous simply to reject, on supposed methodological principle, those parts of chemistry that have not been reduced to physics…. But reductionism is what modern macroeconomics, under the New Classical hegemony, insists on. No exceptions allowed; don’t even ask. Meekly and unreflectively, modern macroeconomics has succumbed to the absurd and arrogant methodological authoritarianism of the New Classical Revolution. What an embarrassment.”

Alice Chen et al.: Why is Infant Mortality Higher in the US than in Europe?: “The US has a substantial – and poorly understood…

…infant mortality disadvantage relative to peer countries. We combine comprehensive micro-data on births and infant deaths in the US from 2000 to 2005 with comparable data from Austria and Finland to investigate this disadvantage. Differential reporting of births near the threshold of viability can explain up to 40% of the US infant mortality disadvantage. Worse conditions at birth account for 75% of the remaining gap relative to Finland, but only 30% relative to Austria. Most striking, the US has similar neonatal mortality but a substantial disadvantage in postneonatal mortality. This postneonatal mortality disadvantage is driven almost exclusively by excess inequality in the US: infants born to white, college-educated, married US mothers have similar mortality to advantaged women in Europe. Our results suggest that high mortality in less advantaged groups in the postneonatal period is an important contributor to the US infant mortality disadvantage.

Paul Krugman: Ordoarithmetic: “Francesco Saraceno is furious and dismayed at Hans-Werner Sinn…

…who says among other things that deflation in southern Europe is necessary to restore competitiveness. Why not inflation in Germany, he asks? But Saraceno fails to understand German logic here. As they see it, their economy was in the doldrums at the end of the 1990s; they then cut labor costs, gaining a huge competitive advantage, and began running gigantic trade surpluses. So their recipe for global recovery is for everyone to deflate, gaining a huge competitive advantage, and begin running gigantic trade surpluses. You may think there’s some kind of arithmetic problem here, but in Germany they have their own intellectual tradition.