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.
The revised edition retains all the strengths of the original edition. In particular, it is:

•Clearly written with lots of  anecdotes and analogies and no Greek letters
•Not a crisis book, but it does explain origins of crisis, and its consequences
•Journalism, not ideology
•Useful: explains economic indicators and economic concepts
•Little: half the size of most hard cover books. And short!
•Cheap! About $15  at Amazon.com.

In my book I walk you through the critical issues in economics today: the sources of long-term economic growth, how recessions become depressions, inflation vs. deflation, globalization, how budget deficits can save an economy or bring on disaster, and why we keep having financial crises. It’s compact (less than 250 short pages), and written in plain English with ample analogies and examples to illustrate the main points.

The Little Book of Economics is also an indispensable resource to students or anyone thinking of working in economics or finance. Each chapter explains key concepts and indicators. For example, it guides you through the Labor Department’s two different surveys of employment and shows why they sometimes conflict, describes the make up of the consumer price index and how it may overstate inflation, and the  many ways to measure the national debt.

It really is little, about the size of a Kindle.

“The Little Book of Economics is a quick, fun and easy read that you’ll want to keep around as a reference, since it’s jammed with so much substance that just about any economic issue you’re going to encounter is made clear here.”

—Adam Davidson, co-founder and co-host of Planet Money, a co-production of NPR and This American Life.

“Greg Ip gives us a lucid and entertaining understanding of ‘the dismal science’ and reveals how economic concepts and institutions affect our daily lives. This little gem can turn all of us into sophisticated and educated citizens.”

—Burton G. Malkiel, Professor of Economics, Princeton University; author of A Random Walk Down Wall Street and The Elements of Investing

“Greg Ip is one of the world’s best economic journalists. The Little Book of Economics will teach you much more than a little about the forces that shape all of our lives.”

—N. Gregory Mankiw, Professor of Economics,HarvardUniversity; author of Principles of Economics

“If you’ve never read anything about economics but have often wondered about it, this is, quite simply, the best book for you to read. It’s short, but packs in a lot of information without becoming boring and often with a small, healthy dose of humor. It’s very, very readable and could be digested on an airplane flight. More importantly, it gives you just enough connections between events and economic theory to pull you deeper into topics that interest you and makes reading economic news that much easier.”

–Trent Hamm, in The Christian Science Monitor online

“The data are well chosen and the writing is decidedly unwonky. Ip skillfully includes essential economic history without making readers feel as though a time warp has thrown them back into an unpleasant undergraduate economics course.”

–USAToday

“Journalist Greg Ip’s neat new book goes a long way toward dealing with our pandemic economic ignorance… [his]  little book packs a big punch.”

–Miami Herald

“It’s my favorite economics book I read last year. The book reinforced a lot of the topics we’ve talked about here on Planet Money. I started reading it on a plane and breezed through it really quickly, but it’s one of those books you want to keep on your shelf and refer back to. I have a ton of pages folded inside my copy and I’ll definitely be rereading parts of it.”

— Caitlin Kenney, producer, NPR’s  Planet Money

“A clever, easily accessible guidebook and reference that explains the building blocks and drivers of economic growth, and the endless tug of war between inflation and deflation.”

— Eric Pianen, in The Fiscal Times

“The Little Book of Economics” …  made me fall in love with economics, so much that I am changing my major to Econ. The simplicity of the book is brilliant, and its content is even more.   I am almost in my third time of reading it.”

— Martin Bradford, reader

Read on for a chapter summary.

Chapter One

The Secrets of Success; How People, Capital, and Ideas Make Countries Rich

In 1990,Japanseemed poised to overtake theUnited Statesas the world’s richest, most powerful economy. What went wrong? Its bubble economy collapsed, and, beneath the surface, the key determinants of long-term growth turned against it: productivity growth slowed down and its work force began to shrink. This chapter explains how population, capital and ideas  (i.e. innovation and technology) add up to  long-term growth and what government does to foster or ruin the  climate for growth.

Chapter Two

Economic Bungee Jumping ; Business Cycles, Recessions, and Depressions . . . Oh My!

Business cycles are an unavoidable and largely unpredictable feature of market economies. In this chapter we learn how psychology, the financial markets and the Federal Reserve all drive these cycles of expansion and recession. Recessions became milder during the Great Moderation of 1982-2007 but they were not eradicated. Financial crises produce severe recessions and weak recoveries and can even result in a depression. The chapter explains how recessions and depressions are identified and the role of the National Bureau of Economic Research in dating recessions.

Chapter Three

In-Flight Monitor; Tracking and Forecasting the Business Cycle from Takeoff to Landing

We have a wealth of tools and data with which to monitor the progress of the economy. They are far from perfect: if the economy were an airplane, then it would have imprecise instruments, a filthy windshield, and old, faded maps. But they’re all we got, and this chapter explains how to use them. It explains the components of gross domestic product and the other key economic indicators such as retail sales and housing and what they tell us about the state of the economy. It shows us how to locate and use economic forecasts, their shortcomings, and how to use the financial markets as leading economic indicators.

Chapter Four

Labor Pains: Employment, Unemployment, and Wages

In the depths of recession it is almost impossible to conceive of where the jobs will come from. Yet the new jobs always come. This chapter explains the determinants of labor force growth, participation in the labor force, employment, unemployment, the natural rate of unemployment, wages, and the role of technology and globalization in wage inequality.

Chapter Five

Fire and Ice: Warning: Inflation and Deflation Are Toxic to Your Economic Health

High inflation is destabilizing and corrosive; deflation can be destructive. This chapter explains how the inflation and deflation damage an economy, and what causes them. The money supply, for all its theoretical importance, is useless in practical terms for understanding inflation. Instead, you should scrutinize the gap between economic output and its potential capacity, and the public’s expectations of inflation. Different measures of inflation are analyzed, in particular the consumer price index, and its shortcomings. It explains the political choices involved in inflation and the impact on social stability.

Chapter Six

Drop the Puck! The Globalization Game Is Here Whether We’re Ready or Not

When you study economic growth, jobs, and interest rates you have to keep in mind that globalization is exerting an often hidden influence, the way a distant planet ’ s gravitational pull alters another planet’s orbit. This is the first of two chapters dealing with globalization; it focuses on international trade. Exports and imports are both important to Americans’ welfare. Their determinants are discussed, along with outsourcing and other current controversies, protectionism, and how theUnited Statesand the World Trade Organization handle trade disputes (which are like the penalties handed out in a hockey game).

Chapter Seven

All the World’s an ATM: Knitting Global Markets Together

Financial globalization has connected factory workers inShanghai, mutual fund investors in theUnited States, sovereign wealth funds in thePersian Gulf, and banks in Düsseldorf to one global ATM. It continuously channels money from savers in one part of the world to borrowers in another. This chapter explains the current and capital accounts, currency markets, fixed and floating exchange rates, howChina’s exchange rate policies have accelerated its growth, and how integrated global capital markets both expand investment opportunities and make the global economy more vulnerable to crisis.

Chapter Eight

The Price of Economic Freedom: Currencies Reflect a Country’s Economic Character, for Better or for Worse

The most important price in the economy is the exchange rate. The currency moves in response to how a country’s saving, economic growth, inflation and financial markets move relative to others.  This chapter explains the purpose of a currency, what drives movements in exchange rates, why countries give up their own currency and join a monetary union. It also explains why the euro zone, the largest monetary union in the world, slid into crisis.

Chapter Nine

All the President’s Men: They Don’t Control the Economy But They Sure Do Try

A president implements economic policy both through his own decisions, aided by a network of advisors and government departments, and through the people he appoints to run regulatory agencies. This chapter identifies the key players and agencies that help the president formulate policy such as the National Economic Council and Treasury Department, and the roles of regulatory agencies such as the Federal Trade Commission and how they influence the economy.

Chapter Ten

The Buck Starts Here: The Federal Reserve’s Amazing Power to Print and Destroy Money

The first of three chapters on the Federal Reserve, this one gives an overview of the Fed’s main responsibilities, its history and the errors that led to today’s structure. It describes the culture and governance of the institution, political threats to its independence and how these have been handled.

Chapter Eleven

White Smoke over the Washington Mall: The Making of Monetary Policy and the Fine Art of Fed Watching

This chapter describes how the Federal Open Market Economy looks at the economy and inflation and the threats to both, how its meetings (held in at its headquarters overlooking Washington’s mall) are run, and how it communicates with the outside world. We get a profile of Ben Bernanke and a look into the motivations of the Fed’s hawks and doves . We learn how the Fed uses open market operations to raise or lower interest rates, then turns to unconventional strategies such as large-scale purchases of government bonds, if it has already lowered interest rates to zero.

Chapter Twelve

When the World Needs a Fireman:America’s Lender of Last Resort and the World’s Crisis Manager

The Fed s unique power to lend at will makes it the financial system’s crisis manager. This chapter shows how the Fed, as lender of last resort, lends to banks in need of cash, and how it stretched the boundaries of its powers to prop up the financial system in the crisis of 2007-2009.

Chapter Thirteen

The Elephant in the Economy: What the Government Giveth and Taketh Away

Fiscal policy is the government’s most pervasive influence on the shape of society. This chapter describes the categories of federal spending (interest, discretionary and mandatory spending) with special attention to entitlements. Taxes come in a wide variety of forms with different impacts on growth and incentives. The chapter explains the budget process, the role of the president and the various congressional committees, and how state budgets differ from the federal budget.

Chapter Fourteen

Good Debt, Bad Debt: How Government Borrowing Can Save or Destroy an Economy

Government borrowing is like Ritalin. At the right dosage it can jolt a lethargic economy out of recession, while an overdose can bring on seizure. This chapter explains how government deficits crowd out investment in good times but are an essential stabilizer during bad times. Fiscal stimulus is usually redundant but at times like in 2009 when the Federal Reserve is impotent, it’s vital.  The specter of a debt crisis such asGreecesuffered hangs over many countries now. This chapter explains why some countries are more at risk of such a crisis than others and whether theUnited Statesis one of them.

Chapter Fifteen

Love-Hate Relationship: The Bipolar Financial System—Essential for Economic Growth But Sometimes It Goes Nuts

The financial system channels capital from those who have it to those who need it, much as the circulatory system moves blood from the heart to the lungs and muscles. This chapter breaks down the financial system into its main parts: financial institutions and capital markets. Financial institutions are composed of banks, investment banks,  and “shadow banks”. All depend on capital and liquidity and the lack of both contributed to the financial crisis. Capital markets are composed of stocks, bonds, asset-backed and mortgage-backed securities, and derivatives, all with a vital role to play and all vulnerable to upheaval.

ISBN 978 -1-118-39157-0 (cloth); 978-1-118-42178-9 (ebk); 978-1-118-58217-6 (ebk);
978-1-118-41753-9 (ebk)