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.

Debt and the deficit: Priority report

Republicans have a plan to force lower spending without risking default

May 18th 2013 | WASHINGTON, DC |From the print edition
[Greg Ip] AUSTERITY may be weighing on America’s economy, but it has its consolations. On May 14th, the Congressional Budget Office sharply revised down its estimate of the budget deficit this fiscal year, to $642 billion or just 4% of GDP, from 5.3% in February. That would put it at less than half its recent peak of 10.1% in 2009.

Measuring inflation: Counting the cost of living

The Fed and the White House wrestle with price indices

May 11th 2013 | WASHINGTON, DC |From the print edition
[Greg Ip] IN RECENT years inflation has been one of the few economic indices that has not caused much trouble to Americans. Contrary to repeated warnings, it has neither rocketed higher nor turned into deflation. But policymakers now face a different sort of inflation problem: determining which of many competing indices is giving the best picture of prices in America.

The most popular measure, the consumer price index (CPI), is a representative basket of goods and services drawn from a survey of the spending habits of 12,200 households. The index assumes that consumers buy the same quantity of each commodity from one period to the next until the basket is updated, every two years. The change in the cost of that basket is the inflation rate. But this almost certainly overstates the cost of living, because consumers continually adjust their spending patterns to buy more of what is cheap and less of what is dear.

America’s statisticians have known about this substitution bias since at least 1961, when a commission urged the development of a better index. In 1996 the Bureau of Economic Analysis (BEA) adopted “chain-weighted” indices—ones that are continuously updated to reflect changing spending patterns—to calculate real GDP. And in 2002 the Bureau of Labour Statistics (BLS) began calculating a chain-weighted version of the CPI.

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.