Things to Read on the Morning of October 2, 2014

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.”