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
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.
Politicians and central bankers are not providing the world with the inflation it needs; some economies face damaging deflation instead
Oct 25th 2014 | WASHINGTON, DC | From the print edition: IT IS a pernicious threat, all the more so because, at its onset, it seems almost benign. After two generations of fighting against inflation, why be worried if the victory looks just a bit too complete, if the ancient enemy is so cowed as to no longer strain against the chains in which it is bound? But the stable low inflation fought for in the 1980s and 1990s and inflation hazardously close to zero are not so far apart. And as inflation drops, slipping into deflation becomes ever easier. It is in that dangerous position that the world now stands.
In America, Britain and the euro zone central banks have a 2% target for inflation. In all three, it is below that target. In Italy, Spain and Greece, which have experienced wrenching crises and recessions, it is below zero (as it also is in Sweden and Israel). Japan, which finally escaped from deflation in 2013 after more than a decade of struggle, is battling not to return. Leave out the effects of a consumption-tax increase and inflation there is barely half way to its 2% target. Even in China inflation is below 2%, compared with a 4% central government target (see chart 1).
The lowflation of being consistently below an already low target is bad in itself; the deflation it could easy lead to is even worse. There are several reasons. The belief that money made tomorrow will be worth less than money today stymies investment; the belief that goods bought tomorrow will be cheaper than goods bought today chokes consumption. Central bankers can no longer set real (that is, inflation-adjusted) interest rates low enough to restore demand.
The Fed mollifies its hawks but now its doves are fretting
Nov 8th 2014 | From the print edition
IN HIS nine years as president of one of the Federal Reserve’s twelve regional branches, in Dallas, Richard Fisher has voted against the Fed’s monetary policy eight times, always in favour of a tighter stance. Not one to let his vote speak for itself, Mr Fisher has compared the Fed’s bond purchases to bourbon served to an alcoholic, “dry inflationary tinder” and water pouring over the “the gunwales of the ship of our economy.”
So few were as happy as Mr Fisher when the Fed last month decided to bring its third round of bond buying (known as “quantitative easing”) to a halt. He and his fellow hawk, Charles Plosser, president of the Philadelphia Fed, registered their approval by not dissenting. Rather, the locus of opposition shifted to the doves, in the form of Narayana Kocherlakota, the president of the Minneapolis Fed, who wanted more bond buying and a stronger commitment to getting inflation higher. Read the rest of this entry »
Modest, though not radical, budget goals are within the Republicans’ reach
OF THE many reasons Congress is scorned, fiscal policy tops the list. Since Republicans took control of the House of Representatives in 2010 bitter battles with Senate Democrats and Barack Obama produced a near-default on the national debt, a white-knuckle fiscal cliff and a 16-day government shutdown. Now that Republicans also control the Senate, they have a chance to improve on that record.
Their first test comes quickly. Most of the federal government is operating on a temporary “continuing resolution” until December 11th. Without an extension, the government will shut down again. Given the beating their image took last time, Republican leaders are unlikely to want a repeat. They are more likely to seek a deal with Democrats, who control the Senate until the end of the year, to extend it at least until April, when Congress is supposed to pass a budget resolution.
That resolution lays out broad guidelines for how much the government may spend and tax. Congress hasn’t passed one since 2010, largely because the Republican House and Democratic Senate have been ideologically too far apart. Once Republicans control both chambers, they can use the resolution to instruct key committees to rewrite the laws governing taxes and entitlements such as Obamacare and Medicare (health care for the elderly) through a process called reconciliation. Provided those changes reduce the budget deficit, a reconciliation bill could not be filibustered by the Democratic minority in the Senate because it only needs 51 votes, not the usual 60; though Mr Obama can still veto it. Read the rest of this entry »
Voters in Kansas will pass judgment on a bold experiment in tax cutting
Public investments in infrastructure do the most good at times like the present
THOSE trying to fly to or from Chicago in the past week learned first-hand the shortcomings of America’s public infrastructure. A suicidal employee set fire to a nearby air-traffic-control centre, resulting in the cancellation of thousands of flights, the third such interruption this year. The chaos is aggravated by a system dating from the 1950s that relies on radar. Unpredictable funding has delayed its planned replacement with a system that uses satellites.
Public infrastructure is one of the few forms of government spending that both liberals and conservatives support. Ports, power lines and schools are essential to the smooth running of the economy. But as America’s outdated air-traffic-control system shows, public investment is at the mercy of the fiscal weather. Cash-strapped governments are loth to pile on debt or raise taxes even for something as popular as a new road. After a burst of stimulus spending in the immediate wake of the recession, public investment has fallen back in the rich world (see charts).
This is profoundly short-sighted. That is the message of a new study by the International Monetary Fund, released as part of its half-yearly “World Economic Outlook”. It found that in rich countries at least, infrastructure spending can significantly boost growth through higher demand in the short run and through higher supply in the long run. This comes with caveats: the results depend on how the investment is financed, how efficiently it is carried out and what the prevailing economic conditions are. As it happens, the present conditions are perfect.
Sep 8th 2014, 16:22 by G.I. | WASHINGTON, D.C
Europe does not yet have its equivalent of Japan’s Abenomics, but Mario Draghi, president of the European Central Bank, pretty much advocated it in his press conference last week. Europe, he said, needs fiscal, monetary and structural policy working together, the three arrows of Abenomics. He acknowledged the ECB’s duty of getting inflation, now 0.3%, back up to its target of near 2%. But the ECB, he said, can’t rescue Europe alone: it needs help from fiscal and structural reforms.
Of course, he’s right that monetary policy can’t initiate fiscal consolidation or liberalize product and labour markets, and that both those things are essential to Europe’s long term health. But the ECB can help determine whether either of those things succeeds. For Europe’s fiscal and regulatory policy makers to do their jobs, it will help immensely if the ECB does its own.
Read the rest of this entry »
Courts and regulators turn the screws on firms that use irregular workers
September 4, 2014
FEDEX, Walmart and McDonald’s are among America’s largest employers. Yet many of the people who drive FedEx’s delivery trucks, staff Walmart’s warehouses and serve McDonald’s hamburgers are not their employees. Instead, they work for subcontractors, franchisees or themselves.
Flexible work arrangements have long been a hallmark of America’s ever-shifting economy. Lately, though, they have drawn more criticism. Earlier this year David Weil of Boston University published “The Fissured Workplace”, which argues that many employers have met competitive pressures by splitting off functions to subcontractors, vendors and franchisees, where workers’ wages and benefits stagnate. On September 3rd the OECD, a club of rich countries, fretted that a divide is opening between secure, permanent jobs and insecure, ill-paid temporary ones. Read the rest of this entry »