The Little Book of Economics: How the Economy Works in The Real World

Newly Revised & Updated for 2013 

“As much a guidebook for our times as an explainer of economics.”

–From the foreword, by Mohamed El-Erian, CEO of PIMCO

If you’re looking for an easy-to-read, authoritative and witty guide to the economy, then The Little Book of Economics: How the Economy Works in The Real World is for you. The first edition, released in the fall of 2010, won rave reviews (see below) from media, readers, teachers and financial professionals alike. I’ve now updated it with plenty of new material to cover developments in the global economy in the last two years. Among the changes:

• • Extensive new discussion of debt, deficits, fiscal stimulus and austerity

• • New detail and descriptions of the Federal Reserve’s unconventional monetary policy, including quantitative easing

• • A new chapter about currencies and the euro crisis

PLEASE READ ON FOR MORE EXPERT RECOMMENDATIONS AND A CHAPTER SUMMARY OR ORDER NOW FROM  AMAZON.COM.

Additional resources for readers of the Little Book of Economics

For readers of The Little Book of Economics I’ve put together this brief overview of books, organizations, blogs, articles and other resources for those who want to dive more deeply into particular subjects or acquire more expertise.  You can access it by clicking here.  I welcome suggestions for additions.

America’s jobs report: Not swooning, not soaring

May 3rd 2013, 15:06 by G.I. | WASHINGTON, D.C.

WILL America be fourth time lucky? A better-than-expected jobs report for April has soothed fears that the economy was swooning, as it has in the spring or summer of each of the last three years. The relief sent the Dow Jones Industrial Average over 15,000 and the S&P 500 over 1,600 for the first time.

Lehman, PSI and the consequences of credit policy: The third lever of macroeconomics

May 2nd 2013, 19:20  by G.I. | WASHINGTON, D.C.

ECONOMICS undergrads learn early on about two levers to manage the macroeconomy: fiscal policy and monetary policy. Events of the last five years make clear that there is a third lever that while poorly understood and difficult to model, it is at times critical: credit policy.

By credit policy (or banking policy or financial policy) I mean anything that affects how the financial system influences aggregate demand. Of course, we’ve always known aggregate demand depends on both the central bank’s policy rate and the spread over that rate paid by households and firms. But before the cirisis the relationship between the policy rate and what borrowers paid was assumed to be either constant, or endogenous to monetary policy or the business cycle.

American bond markets: Term report

Regulators fret about the risk of a sudden rise in long-term bond yields

May 4th 2013  | Washington, DC |From the print edition

[Greg Ip] THE Federal Reserve has long acknowledged trade-offs in its efforts to revive growth with ultra-easy monetary policy. Now those trade-offs are getting starker. On April 26th America’s economy was reported to have grown by 2.5% on an annualised rate in the first quarter: stupendous by European standards, but less than expected. On April 29th underlying inflation slipped to just 1.1%. On May 1st the Fed duly said it would keep rates near zero, as it has since 2008, and keep buying $85 billion of government bonds a month, although it may vary the pace depending on the outlook for inflation and jobs.

The Federal Reserve speaks: Fearful symmetry

May 1st 2013, 21:45 by G.I. | WASHINGTON, D.C.

THE Federal Reserve, as widely expected, stood pat today, reaffirming its commitment to near zero interest rates until unemployment fell to 6.5% or lower, and continuing to buy $85 billion of Treasury and mortgage-backed bonds until the jobs market improved substantially.

But its otherwise ho-hum statement jolted markets with this new line: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

The budget: Something for everyone

Barack Obama’s latest budget makes concessions to Republicans

Apr 13th 2013 | WASHINGTON, DC |From the print edition

[Greg Ip] WHEN negotiations over a grand bargain on America’s budget collapsed in December, Republican leaders vowed not to negotiate with Barack Obama again. But perhaps Mr Obama didn’t get the memo, because on April 10th he proposed a new budget crafted to lure Republicans back to the grand bargaining table.

How Mrs Thatcher smashed the Keynesian consensus

Apr 9th 2013, 14:13 by G.I. | WASHINGTON, D.C.

[Greg Ip] In March 1981, 364 eminent British economists published a letter to Margaret Thatcher in The Times condemning her plans to hike taxes even as her monetarist attack on inflation plunged the economy ever deeper into recession. The signatories wrote:

There is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment … [P]resent politics will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.

E-commerce: Click and pay

Both parties are getting keener to tax sales on the internet

Apr 6th 2013 | WASHINGTON, DC |From the print edition
[Greg Ip]THE past few years have brought little relief for pinched state finances. But on March 22nd 75 senators, including majorities of both parties, approved an amendment to a proposed federal budget which, if enacted, would allow states to collect taxes on sales by internet retailers based in other states.

It makes no economic sense to tax sales in shops and over the internet differently. The prohibition is constitutional. In 1992 the Supreme Court ruled that states could not force out-of-state retailers to collect tax on sales to residents unless Congress, which oversees interstate commerce, said so. Only retailers with a physical presence—a “nexus”, in the legal jargon—in the state could be taxed.