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The Little Book of Economics: How the Economy Works in the Real World
One positive side-effect of the recent financial market meltdown that toppled giant, century-old institutions and cost millions their jobs is that it created a strong desire among many Americans to better understand how the U.S. economy functions. In The Little Book of Economics , Greg, Ip, one of the country’s most recognized and respected economics journalists, walks readers through how the economy really works. Written for the inquisitive layman who doesn’t want to plow through academic jargon and Greek letters or pore over charts and tables, The Little Book of Economics offers indispensible insight into how the American economy works – or, doesn’t. With engaging and accessible prose, the book A must read for anyone who wants a better grasp of the economy without taking a course in economics , The Little Book of Economics is a unique and engaging look at how the economy works in all its wonderful and treacherous ways.
250 pages, Hardcover
First published August 26, 2010
220 people are currently reading
1780 people want to read
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August 5, 2018
The Little Review of Economics
Usually when an Economics book claims to condense core ideas into a short frame, it is best for the reader to be on the lookout for ideological biases. It is hard to boil down the opposing ideas that make up Economics into any simple framework without committing many sins of omission.
As all such books do, Ip too starts with the set formula of Economics text books: first give a brief on how economics is perceived as such a hard and complex discipline and then assure the reader that in this book it is presented in a simple and concise manner. What is left out in such introduction is the fact that the book hardly ever even attempts to address the whole field.
Contrary to most such books, Ip manages to steer clear of obvious bias and also manages to keep the explanations simple enough for the lay reader (though he uses sections called "into the weeds" to explain more complex concepts) In all, this is a cute little book to have and it can serve as a useful introduction. Ip never goes beyond the most basic of concepts and never ventures into the really controversial areas - that is how he keeps it simple and bias-free. This reduces the usefulness somewhat, but on the other other hand, it makes it a book that can be recommended to a novice student without fear of early distortion. Which was my purpose in reading this one.
1. A Recipe for Economic Growth
Why do some countries grow and some stagnate? In a nutshell, growth rests on two building blocks: population and productivity.
1. Population determines how many workers a country will have.
2. Productivity, or output per worker, determines how much each worker earns.
Thus we arrive at the following recipe:
a. Take a Growing Population
b. Add Capital
c. Season well with Ideas.
d. Stir with a good dose of Human Capital, Rule of Law & Well-functioning Markets
e. Serve and monitor step d for deviations.
In Short:
• Long-term economic growth depends on population and productivity. A growing population is the source of future workers, and the more productive those workers are, the richer they become. It takes investment in both capital and ideas to raise productivity.
• Ideas enable us to recombine the workers and the capital we already have in new ways to produce brand-new products or old products at a lower price. Competition forces countries and companies to copy each other’s ideas and constantly come up with new ones.
• Both investment and ideas must be nurtured. Honest government and trustworthy laws encourage investors and innovators to take risks in hopes of reaping the rewards. Investment in education enables workers to take advantage of the latest ideas. And free markets ensure that dying, unproductive industries are culled so that growing industries can attract capital and workers.
2. Business Cycles, Recessions, and Depressions
Every business expansion eventually dies. Only the cause of death changes. Economists often miss fatal imbalances because they’re looking in the wrong place. Having vaccinated everyone against whatever killed the last business cycle, they fail to spot the virus that infects the current one. Depressions occur when the economy’s normal recuperative mechanism fails to engage.
• Ultimately, long-run growth drives our standard of living. In the short run, the economy goes through regular cycles of expansion and recession. These cycles are driven by how much consumers and businesses spend, which in turn depends a lot on their view of the future.
• Bullish expectations boost investment, stock prices, and lending, all of which feed back to the economy. Eventually, though, expectations get ahead of fundamentals, creating imbalances. These imbalances come undone, usually with a nudge from the Federal Reserve, producing recessions.
• Recessions create pent-up demand. Lower interest rates eventually release that demand, bringing the recession to a close. Sometimes, though, this natural restorative process fails, because a broken financial system dams the flow of credit. Then, a recession may become a depression.
3. Tracking and Forecasting the Business Cycle ( from Takeoff to Landing)
The Four Engines of the Economy have to be running smoothly for it to operate well. These are the ones we should monitor (in the order given) to be able to predict (with reasonable confidence) where the Flight is headed:
1) Consumer spending and housing: 66% to 76% of GDP
2) Business investment in buildings, equipment, and inventories: 8% to 13% of GDP
3) Government spending: 18% to 20% of GDP
4) Exports: 8% to 12% of GDP
Consumer spending is the economy’s ballast: though large, it doesn’t fluctuate much from quarter to quarter, except for big-ticket purchases like houses and cars.
Housing though a form of consumer spending, behaves differently from the rest of this category - it is a highly volatile component, one of the most volatile things in the economy.
• Movements in GDP are dominated by such "most volatile" categories of spending: housing, business inventories, and big-ticket consumer purchases, like cars.
• Forecasting the business cycle is risky business; you have to carefully monitor a continuous blizzard of data which, though faithfully gathered, may be out of date and inaccurate. Stock prices, the yield curve, and commodity prices are all useful leading indicators but send a lot of error signals.
4. Employment, Unemployment, and Wages
• In the short run, the number of jobs rises and falls with the business cycle. In the long run, though, the growth in jobs usually tracks almost perfectly the growth in the number of people who want jobs.
• The unemployment rate is the single best signpost of the economy’s health. When the economy reaches full strength, the unemployment reaches its so-called natural rate.
• Pay usually tracks productivity, which is why, over the years, workers have gotten richer. In recent decades, however, the best-paid workers have seen their salaries grow much more rapidly than the rest of the work force has, because of the premium on skills, weaker unions, and superstar salaries, whether for lawyers or for athletes.
5. Inflation and Deflation
There are two competing schools of thought on the causes inflation:
a) Monetarism - blames inflation on too much money chasing too few goods. This makes great sense in theory but is less obvious in real life.
This is because the central bank doesn’t control the entire money supply, only a narrow portion of it: specifically, the notes, coins, and reserves it supplies to commercial banks.
For money to cause inflation, it must be lent and spent. Banks lend more only when they have healthy balance sheets and a lot of eager, creditworthy customers. Consumers spend when they feel confident about their jobs and salaries - both these things are not controlled by the Central Bank's actions directly.
Monetarists claim that growth in the money supply leads to more spending and more inflation. Actually, it’s the other way around. Every dollar consumers borrow or spend returns to the banking system and shows up in someone else’s checking or savings deposit or money market mutual fund, which are all part of the broader money supply (which has labels like M1, M2, and M3).
For this reason, the Fed doesn’t target the money supply. It uses its control of reserves only to ensure banks have enough cash to keep their ATMs full, and to control short-term interest rates. Therefore, its influence over the broad money supply is indirect. If it raises interest rates, it will dampen spending and, eventually, the money supply. If, however, the economy is truly moribund, because no one wants to lend or borrow, the Fed can drive interest rates to zero and print gobs of money without causing broader measures of money and credit to grow.
b) So save some trouble and don’t preoccupy yourself with the money supply. For a more realistic picture of inflation— look at the neo-Keynesian picture.
• The money supply is a lousy guide to where inflation is going. Better, instead, to monitor how far the economy is operating from its capacity. For example, if unemployment is 5 percent, it doesn’t have much spare capacity left. Wages are the best evidence of an economy running out of capacity. If wages aren’t rising, a wage-price spiral can’t happen.
• Inflation is more likely to rise if people expect it to, because they’ll adjust their wage and price behavior accordingly. Stable inflation expectations are a bulwark against both inflation and deflation.
6. Globalization
• Falling trade barriers, rising affluence, and the plunging cost of selling things across borders have fueled globalization. Able to buy from and sell to the entire world, even small countries can achieve exceptional levels of wealth.
• Trade makes the United States a whole richer. But the benefits are not shared equally. Especially as services trade grows, the biggest gainers will be the highest skilled workers while those with the least skills will see their wages eroded.
• Free trade is not politically popular and every country routinely indulges its protectionist impulses. Yet free trade survives because countries have also agreed to subject their actions to the rules of the World Trade Organization which keeps trade spats from becoming trade wars.
7. The International Market
• Global capital markets let investors diversify their portfolios and borrowers choose from different sources of capital. There’s a downside, though: Investors’ savings may be battered by events in far off countries, while companies and countries can abruptly have their access to capital cut off.
• Currencies over time reflect their purchasing power and thus countries’ inflation. But in the short run, economic growth, interest rates, and current and capital account balances drive currencies, sometimes violently.
• The United States borrows cheaply abroad in great part because foreign central banks like to hold dollars: they’re safe, easy to convert to other currencies, and backed by a strong, stable country.
8. Controlling the Economy (or die trying!)
• Governments don’t control the economy but they sure try. A government’s economic agenda is dictated by ideology, but how it is implemented depends on the circle of economic advisers in the various high profile Economic bodies.
• The governement also exercises a lot of influence through his appointments to dozens of federal regulatory agencies. The bank regulators, for example, influence who gets credit and under what terms while the Justice Department and the Trade dept set the ground rules for business conduct and competition.
9. The Central Bank/Reserve
• The Fed stands alone in its economic sway and its independence. It can print and destroy money at will to protect the financial system from panics and to manage the business cycle.
• The Fed is a compromise between political accountability and private independence. Its politically appointed governors and privately appointed reserve bank presidents make up the Federal Open Market Committee, which sets monetary policy at meetings eight times a year.
10. Monetary Policy
• When setting interest rates, the Fed weighs how far the economy is from its potential, and how far inflation is likely to be from 2 percent. This is harder than it sounds because the economy responds unpredictably and with lags.
• At meetings, Fed officials listen and debate the best path for monetary policy. A few dissent but the chairman always carries the day. The Fed gives out so much information that the result is seldom a surprise but it still moves markets.
• The Fed carries out monetary policy by using open market operations to move the Federal Funds rate, charged on loans between banks, up or down.
• When the Funds rate fell to zero in 2008 the Fed turned to quantitative easing: buying up bonds to push down long-term interest rates. Quantitative easing has unpredictable political and economic consequences.
11. Lender of Last Resort & Crisis Manager
• The Federal Reserve has made its name managing the economy through monetary policy, but its parents had a different career in mind: to act as lender of last resort when banks ran out of cash. The Fed is uniquely suited to the job because it can simply create whatever money it needs to lend, primarily through loans from its discount window, and withdraw the money from existence when the loans are repaid.
• During the financial crisis the Fed dusted off a loophole to lend not just to banks but to a wide assortment of companies. In so doing it may have saved the country from another Depression, but it also awakened politicians to its formidable power.
12. Fiscal Policy
• The federal government is a gigantic player in the economy and it will get bigger in coming years as government services expand, the population ages, and interest on the national debt mounts.
• Federal spending comes in three varieties:
1. Interest on the debt.
2. Discretionary spending.
3. Mandatory spending.
• Tax revenue comes mainly from personal and corporate income and payroll taxes. Compared to other countries, the United States relies relatively little on consumption taxes such as on gasoline or a value-added tax.
• Every year the president proposes a budget; Congress accepts some of it but ignores a lot as it passes the appropriations, tax, and mandatory program laws.
• Unlike the federal government, states must balance their budgets each year, which makes for profligacy in good times and wrenching austerity in bad times.
13. The Debt in the Machine
• Chronic deficits compete with private borrowers for limited savings driving up interest rates, retarding investment, and impairing future economic growth. Interest on the national debt starves other government programs.
• Budget deficits can be good. During recessions, tax revenues fall and spending on the poor and unemployed rises, softening the sting. There’s less competition with private borrowing.
• Governments sometimes use fiscal stimulus—that is, a deliberate increase in the deficit—to boost a weak economy. This is usually unnecessary, unless the Fed is unable to do the job because it has already cut interest rates to zero.
• A breaking point can come when debt is so high that investors suspect governments will try to renege either by defaulting, or through inflation.
• The United States’ long history of fiscal probity, favorable long-term growth outlook and control of the world’s reserve currency, suggest it has a long way to go before it faces a crisis, but the risk can’t be rule out.
14. The Financial Markets
- Stocks are simple and glamorous. Credit is complicated and dull. Yet it matters more to the economy.
- Mortgage-backed securities are a great idea that Wall Street, as is its habit, took to excess.
Years ago you would put your money in a bank and the bank would grant a mortgage to your neighbor. Now, you:
• Put your money in a pension fund
• Which is a partner in a hedge fund
• Which buys a collateralized debt obligation
• Which holds a mortgage-backed security
• That a bank put together
• Out of mortgages it acquired from a mortgage broker
• Who made the original loan to your neighbor
Did you get all that?
Anyway,
• You don’t have to hug your banker, but what he does is essential to economic growth. Banks and capital markets match savers with those who need capital.
• Over the years, banks have been joined by shadow banks that, like banks, made loans but don’t take deposits and aren’t as tightly regulated. All these institutions need capital to protect against losses and liquidity to repay lenders. Too much of either, and profits suffer. Too little, and the institution could fail.
• Equities get all the attention in the capital markets but the economy relies more on a healthy market for debt securities, such as money market paper, bonds, and asset-backed securities.
15. The Multiple, Recurring Causes of Financial Crises
- Almost by definition, crises are unexpected because they involve collective errors of judgment.
Condition 1: Afloat on a Bubble
(But, not all bubbles lead to crises. To produce a crisis requires leverage.)
Condition 2: Leverage, the Prime Suspect
Condition 3: Mismatches, the First Coconspirator
(Rising dependence on short-term borrowing is often a telltale sign of trouble -- Mismatch = borrowing short-term to make long-term investments.)
Condition 4: Contagion
Condition 5: Elections
(Crises often come in election years. They are often a result of economic stresses that can only be fixed with painful remedies that politicians running for election don’t want to administer.)
So,
• Every crisis is different but they share certain traits. An asset price that deviates from historical fundamentals may signal a bubble, but not when or how the bubble will burst.
• Debt is a prime suspect in every crisis. Currency and interest rate mismatches, reliance on short-term debt, and moral hazard are all coconspirators.
• Crises are spread through contagion: Investors burned on one company or country flee others that look like it. A failing bank pulls down others with whom it trades or has other relationships. Because of contagion, companies or countries that were merely illiquid become insolvent and collapse.
• Highly Leveraged bubbles + impending Elections = WATCH OUT!
Anything familiar?
Usually when an Economics book claims to condense core ideas into a short frame, it is best for the reader to be on the lookout for ideological biases. It is hard to boil down the opposing ideas that make up Economics into any simple framework without committing many sins of omission.
As all such books do, Ip too starts with the set formula of Economics text books: first give a brief on how economics is perceived as such a hard and complex discipline and then assure the reader that in this book it is presented in a simple and concise manner. What is left out in such introduction is the fact that the book hardly ever even attempts to address the whole field.
Contrary to most such books, Ip manages to steer clear of obvious bias and also manages to keep the explanations simple enough for the lay reader (though he uses sections called "into the weeds" to explain more complex concepts) In all, this is a cute little book to have and it can serve as a useful introduction. Ip never goes beyond the most basic of concepts and never ventures into the really controversial areas - that is how he keeps it simple and bias-free. This reduces the usefulness somewhat, but on the other other hand, it makes it a book that can be recommended to a novice student without fear of early distortion. Which was my purpose in reading this one.
1. A Recipe for Economic Growth
Why do some countries grow and some stagnate? In a nutshell, growth rests on two building blocks: population and productivity.
1. Population determines how many workers a country will have.
2. Productivity, or output per worker, determines how much each worker earns.
Thus we arrive at the following recipe:
a. Take a Growing Population
b. Add Capital
c. Season well with Ideas.
d. Stir with a good dose of Human Capital, Rule of Law & Well-functioning Markets
e. Serve and monitor step d for deviations.
In Short:
• Long-term economic growth depends on population and productivity. A growing population is the source of future workers, and the more productive those workers are, the richer they become. It takes investment in both capital and ideas to raise productivity.
• Ideas enable us to recombine the workers and the capital we already have in new ways to produce brand-new products or old products at a lower price. Competition forces countries and companies to copy each other’s ideas and constantly come up with new ones.
• Both investment and ideas must be nurtured. Honest government and trustworthy laws encourage investors and innovators to take risks in hopes of reaping the rewards. Investment in education enables workers to take advantage of the latest ideas. And free markets ensure that dying, unproductive industries are culled so that growing industries can attract capital and workers.
2. Business Cycles, Recessions, and Depressions
Every business expansion eventually dies. Only the cause of death changes. Economists often miss fatal imbalances because they’re looking in the wrong place. Having vaccinated everyone against whatever killed the last business cycle, they fail to spot the virus that infects the current one. Depressions occur when the economy’s normal recuperative mechanism fails to engage.
• Ultimately, long-run growth drives our standard of living. In the short run, the economy goes through regular cycles of expansion and recession. These cycles are driven by how much consumers and businesses spend, which in turn depends a lot on their view of the future.
• Bullish expectations boost investment, stock prices, and lending, all of which feed back to the economy. Eventually, though, expectations get ahead of fundamentals, creating imbalances. These imbalances come undone, usually with a nudge from the Federal Reserve, producing recessions.
• Recessions create pent-up demand. Lower interest rates eventually release that demand, bringing the recession to a close. Sometimes, though, this natural restorative process fails, because a broken financial system dams the flow of credit. Then, a recession may become a depression.
3. Tracking and Forecasting the Business Cycle ( from Takeoff to Landing)
The Four Engines of the Economy have to be running smoothly for it to operate well. These are the ones we should monitor (in the order given) to be able to predict (with reasonable confidence) where the Flight is headed:
1) Consumer spending and housing: 66% to 76% of GDP
2) Business investment in buildings, equipment, and inventories: 8% to 13% of GDP
3) Government spending: 18% to 20% of GDP
4) Exports: 8% to 12% of GDP
Consumer spending is the economy’s ballast: though large, it doesn’t fluctuate much from quarter to quarter, except for big-ticket purchases like houses and cars.
Housing though a form of consumer spending, behaves differently from the rest of this category - it is a highly volatile component, one of the most volatile things in the economy.
• Movements in GDP are dominated by such "most volatile" categories of spending: housing, business inventories, and big-ticket consumer purchases, like cars.
• Forecasting the business cycle is risky business; you have to carefully monitor a continuous blizzard of data which, though faithfully gathered, may be out of date and inaccurate. Stock prices, the yield curve, and commodity prices are all useful leading indicators but send a lot of error signals.
4. Employment, Unemployment, and Wages
• In the short run, the number of jobs rises and falls with the business cycle. In the long run, though, the growth in jobs usually tracks almost perfectly the growth in the number of people who want jobs.
• The unemployment rate is the single best signpost of the economy’s health. When the economy reaches full strength, the unemployment reaches its so-called natural rate.
• Pay usually tracks productivity, which is why, over the years, workers have gotten richer. In recent decades, however, the best-paid workers have seen their salaries grow much more rapidly than the rest of the work force has, because of the premium on skills, weaker unions, and superstar salaries, whether for lawyers or for athletes.
5. Inflation and Deflation
There are two competing schools of thought on the causes inflation:
a) Monetarism - blames inflation on too much money chasing too few goods. This makes great sense in theory but is less obvious in real life.
This is because the central bank doesn’t control the entire money supply, only a narrow portion of it: specifically, the notes, coins, and reserves it supplies to commercial banks.
For money to cause inflation, it must be lent and spent. Banks lend more only when they have healthy balance sheets and a lot of eager, creditworthy customers. Consumers spend when they feel confident about their jobs and salaries - both these things are not controlled by the Central Bank's actions directly.
Monetarists claim that growth in the money supply leads to more spending and more inflation. Actually, it’s the other way around. Every dollar consumers borrow or spend returns to the banking system and shows up in someone else’s checking or savings deposit or money market mutual fund, which are all part of the broader money supply (which has labels like M1, M2, and M3).
For this reason, the Fed doesn’t target the money supply. It uses its control of reserves only to ensure banks have enough cash to keep their ATMs full, and to control short-term interest rates. Therefore, its influence over the broad money supply is indirect. If it raises interest rates, it will dampen spending and, eventually, the money supply. If, however, the economy is truly moribund, because no one wants to lend or borrow, the Fed can drive interest rates to zero and print gobs of money without causing broader measures of money and credit to grow.
b) So save some trouble and don’t preoccupy yourself with the money supply. For a more realistic picture of inflation— look at the neo-Keynesian picture.
• The money supply is a lousy guide to where inflation is going. Better, instead, to monitor how far the economy is operating from its capacity. For example, if unemployment is 5 percent, it doesn’t have much spare capacity left. Wages are the best evidence of an economy running out of capacity. If wages aren’t rising, a wage-price spiral can’t happen.
• Inflation is more likely to rise if people expect it to, because they’ll adjust their wage and price behavior accordingly. Stable inflation expectations are a bulwark against both inflation and deflation.
6. Globalization
• Falling trade barriers, rising affluence, and the plunging cost of selling things across borders have fueled globalization. Able to buy from and sell to the entire world, even small countries can achieve exceptional levels of wealth.
• Trade makes the United States a whole richer. But the benefits are not shared equally. Especially as services trade grows, the biggest gainers will be the highest skilled workers while those with the least skills will see their wages eroded.
• Free trade is not politically popular and every country routinely indulges its protectionist impulses. Yet free trade survives because countries have also agreed to subject their actions to the rules of the World Trade Organization which keeps trade spats from becoming trade wars.
7. The International Market
• Global capital markets let investors diversify their portfolios and borrowers choose from different sources of capital. There’s a downside, though: Investors’ savings may be battered by events in far off countries, while companies and countries can abruptly have their access to capital cut off.
• Currencies over time reflect their purchasing power and thus countries’ inflation. But in the short run, economic growth, interest rates, and current and capital account balances drive currencies, sometimes violently.
• The United States borrows cheaply abroad in great part because foreign central banks like to hold dollars: they’re safe, easy to convert to other currencies, and backed by a strong, stable country.
8. Controlling the Economy (or die trying!)
• Governments don’t control the economy but they sure try. A government’s economic agenda is dictated by ideology, but how it is implemented depends on the circle of economic advisers in the various high profile Economic bodies.
• The governement also exercises a lot of influence through his appointments to dozens of federal regulatory agencies. The bank regulators, for example, influence who gets credit and under what terms while the Justice Department and the Trade dept set the ground rules for business conduct and competition.
9. The Central Bank/Reserve
• The Fed stands alone in its economic sway and its independence. It can print and destroy money at will to protect the financial system from panics and to manage the business cycle.
• The Fed is a compromise between political accountability and private independence. Its politically appointed governors and privately appointed reserve bank presidents make up the Federal Open Market Committee, which sets monetary policy at meetings eight times a year.
10. Monetary Policy
• When setting interest rates, the Fed weighs how far the economy is from its potential, and how far inflation is likely to be from 2 percent. This is harder than it sounds because the economy responds unpredictably and with lags.
• At meetings, Fed officials listen and debate the best path for monetary policy. A few dissent but the chairman always carries the day. The Fed gives out so much information that the result is seldom a surprise but it still moves markets.
• The Fed carries out monetary policy by using open market operations to move the Federal Funds rate, charged on loans between banks, up or down.
• When the Funds rate fell to zero in 2008 the Fed turned to quantitative easing: buying up bonds to push down long-term interest rates. Quantitative easing has unpredictable political and economic consequences.
11. Lender of Last Resort & Crisis Manager
• The Federal Reserve has made its name managing the economy through monetary policy, but its parents had a different career in mind: to act as lender of last resort when banks ran out of cash. The Fed is uniquely suited to the job because it can simply create whatever money it needs to lend, primarily through loans from its discount window, and withdraw the money from existence when the loans are repaid.
• During the financial crisis the Fed dusted off a loophole to lend not just to banks but to a wide assortment of companies. In so doing it may have saved the country from another Depression, but it also awakened politicians to its formidable power.
12. Fiscal Policy
• The federal government is a gigantic player in the economy and it will get bigger in coming years as government services expand, the population ages, and interest on the national debt mounts.
• Federal spending comes in three varieties:
1. Interest on the debt.
2. Discretionary spending.
3. Mandatory spending.
• Tax revenue comes mainly from personal and corporate income and payroll taxes. Compared to other countries, the United States relies relatively little on consumption taxes such as on gasoline or a value-added tax.
• Every year the president proposes a budget; Congress accepts some of it but ignores a lot as it passes the appropriations, tax, and mandatory program laws.
• Unlike the federal government, states must balance their budgets each year, which makes for profligacy in good times and wrenching austerity in bad times.
13. The Debt in the Machine
• Chronic deficits compete with private borrowers for limited savings driving up interest rates, retarding investment, and impairing future economic growth. Interest on the national debt starves other government programs.
• Budget deficits can be good. During recessions, tax revenues fall and spending on the poor and unemployed rises, softening the sting. There’s less competition with private borrowing.
• Governments sometimes use fiscal stimulus—that is, a deliberate increase in the deficit—to boost a weak economy. This is usually unnecessary, unless the Fed is unable to do the job because it has already cut interest rates to zero.
• A breaking point can come when debt is so high that investors suspect governments will try to renege either by defaulting, or through inflation.
• The United States’ long history of fiscal probity, favorable long-term growth outlook and control of the world’s reserve currency, suggest it has a long way to go before it faces a crisis, but the risk can’t be rule out.
14. The Financial Markets
- Stocks are simple and glamorous. Credit is complicated and dull. Yet it matters more to the economy.
- Mortgage-backed securities are a great idea that Wall Street, as is its habit, took to excess.
Years ago you would put your money in a bank and the bank would grant a mortgage to your neighbor. Now, you:
• Put your money in a pension fund
• Which is a partner in a hedge fund
• Which buys a collateralized debt obligation
• Which holds a mortgage-backed security
• That a bank put together
• Out of mortgages it acquired from a mortgage broker
• Who made the original loan to your neighbor
Did you get all that?
Anyway,
• You don’t have to hug your banker, but what he does is essential to economic growth. Banks and capital markets match savers with those who need capital.
• Over the years, banks have been joined by shadow banks that, like banks, made loans but don’t take deposits and aren’t as tightly regulated. All these institutions need capital to protect against losses and liquidity to repay lenders. Too much of either, and profits suffer. Too little, and the institution could fail.
• Equities get all the attention in the capital markets but the economy relies more on a healthy market for debt securities, such as money market paper, bonds, and asset-backed securities.
15. The Multiple, Recurring Causes of Financial Crises
- Almost by definition, crises are unexpected because they involve collective errors of judgment.
Condition 1: Afloat on a Bubble
(But, not all bubbles lead to crises. To produce a crisis requires leverage.)
Condition 2: Leverage, the Prime Suspect
Condition 3: Mismatches, the First Coconspirator
(Rising dependence on short-term borrowing is often a telltale sign of trouble -- Mismatch = borrowing short-term to make long-term investments.)
Condition 4: Contagion
Condition 5: Elections
(Crises often come in election years. They are often a result of economic stresses that can only be fixed with painful remedies that politicians running for election don’t want to administer.)
So,
• Every crisis is different but they share certain traits. An asset price that deviates from historical fundamentals may signal a bubble, but not when or how the bubble will burst.
• Debt is a prime suspect in every crisis. Currency and interest rate mismatches, reliance on short-term debt, and moral hazard are all coconspirators.
• Crises are spread through contagion: Investors burned on one company or country flee others that look like it. A failing bank pulls down others with whom it trades or has other relationships. Because of contagion, companies or countries that were merely illiquid become insolvent and collapse.
• Highly Leveraged bubbles + impending Elections = WATCH OUT!
Anything familiar?
December 6, 2017
The author says that growth comes from population size and productivity which increases the pay of productive people. Unfortunately, even the examples he picks show this isn't even remotely true. There is no necessary relationship between what a person gets paid and how productive they are. There is a necessary relationship between how much someone has the authority to determine their own pay and how much they get paid, but this has no relationship to actual productivity. It's just about who has the leverage to force others to give them more money. This is true whether you're talking about someone stealing money from you at gunpoint or at the tip of pen. Leverage determines pay and productivity is largely irrelevant. Overlaps are coincidental.
It is true that sometimes people who deserve more get more but that should not be confused with the belief that this is what happens most or even much of the time. The evidence simply doesn't support the idea of the connection being particularly frequent. The author tries to hide this by cherry picking the examples of superstar Athletes/Entertainers and corporate executives, but the difference between those two two groups and why they each get paid so much is vast and obvious.
Athletes and Entertainers see their pay rates increase because they are the actual draw and, over time, the ones with enough power to force the issue will take a greater share of the income they create, none of which would exist without them. In other words, if Beyonce stopped showing up for concerts, the whole tour shuts down. No one keeps going to see her backup dancers. Beyonce is the show and the share of the money she gets should reflect that literally everyone but her is expendable.
Executive pay, on the other hand, increases for the same reason that there are no term limits on Congress: if you let people vote on their own pay and job security, they will always vote to increase their end. If Jamie Dimon left Chase, no one would stop banking with Chase. There would be no run on the bank like there'd be a run on refund requests if Beyonce stopped showing up for concerts. Steve Jobs died and Apple has only grown since his death and he was perhaps the most revered CEO in history. It turns out that Executives are closer to place-holders than they are to being the actual show like athletes and entertainers are. They take all the benefit of everyone else's productivity increases because they are the ones that decide who gets more money and, naturally, their answer to who should get paid more is always "me and my executive friends." They do it because they can, not because they deserve it.
Anyone claiming to teach you about economics who is unwilling to even acknowledge this massive difference is probably not telling you the truth on other things, too. In this case, he suggests that only executives get their pay increased even though productivity increases across the board because Susan Boyle sings songs and that's the same thing. I hope it's clear that this argument is not just incorrect but fundamentally disingenuous. Frankly, I find it hard to believe a career professional has not noticed this.
This guy talks like he works for Rupert Murdoch.
[Edit: After finishing the book, I checked out the author and (surprise!) he works for Rupert Murdoch. It shouldn't be so easy to smell these propagandists coming.]
It is true that sometimes people who deserve more get more but that should not be confused with the belief that this is what happens most or even much of the time. The evidence simply doesn't support the idea of the connection being particularly frequent. The author tries to hide this by cherry picking the examples of superstar Athletes/Entertainers and corporate executives, but the difference between those two two groups and why they each get paid so much is vast and obvious.
Athletes and Entertainers see their pay rates increase because they are the actual draw and, over time, the ones with enough power to force the issue will take a greater share of the income they create, none of which would exist without them. In other words, if Beyonce stopped showing up for concerts, the whole tour shuts down. No one keeps going to see her backup dancers. Beyonce is the show and the share of the money she gets should reflect that literally everyone but her is expendable.
Executive pay, on the other hand, increases for the same reason that there are no term limits on Congress: if you let people vote on their own pay and job security, they will always vote to increase their end. If Jamie Dimon left Chase, no one would stop banking with Chase. There would be no run on the bank like there'd be a run on refund requests if Beyonce stopped showing up for concerts. Steve Jobs died and Apple has only grown since his death and he was perhaps the most revered CEO in history. It turns out that Executives are closer to place-holders than they are to being the actual show like athletes and entertainers are. They take all the benefit of everyone else's productivity increases because they are the ones that decide who gets more money and, naturally, their answer to who should get paid more is always "me and my executive friends." They do it because they can, not because they deserve it.
Anyone claiming to teach you about economics who is unwilling to even acknowledge this massive difference is probably not telling you the truth on other things, too. In this case, he suggests that only executives get their pay increased even though productivity increases across the board because Susan Boyle sings songs and that's the same thing. I hope it's clear that this argument is not just incorrect but fundamentally disingenuous. Frankly, I find it hard to believe a career professional has not noticed this.
This guy talks like he works for Rupert Murdoch.
[Edit: After finishing the book, I checked out the author and (surprise!) he works for Rupert Murdoch. It shouldn't be so easy to smell these propagandists coming.]
Read
June 7, 2024Can’t really give this a rating but I enjoyed this book a lot. It offered a good starting place to understanding the economy and financial news, however much was over my head (my fault - not the book’s). Will definitely return to some of the chapters to strengthen my understanding. Thankful my dad gave me this book 😁 I listened to it on audiobook
September 14, 2010
This was a great little book of economics - true to its title! The book covered some basic macroeconomics theories as well as some finance. I think it gave decent background info for those with no econ or finance background, but it definitely not for someone who wanted to have more details on the subject. I liked the fact that it ties a lot back to the current financial crisis with, in my opinion, unbiased point of view. It tried to present both sides of the coins. Bottom line is everything is unknown. The game changes depending on so many different factors. The system is complex and can be very fragile. One of many thoughts worth pondering: "Like the Fed's apparent success at taming the business cycle, its crisis-management skills may have lulled us into thinking the economy has become a safer, less violent place" (166). I actually would have like to see afterword with Ip's thoughts on what's going to happen with the current crisis.
I also enjoyed his writing style. It made for fast reading, and it wasn't dull to read. He spun some humorous analogies in there, which made things easier to understand. For example, I liked the fact that he compared crises to viruses: "Having vaccinated everyone against whatever killed the last business cycle, they fail to spot the virus that infects the current one" (27). I knew most of the information covered in the book, but it still was refreshing to read it.
I also enjoyed his writing style. It made for fast reading, and it wasn't dull to read. He spun some humorous analogies in there, which made things easier to understand. For example, I liked the fact that he compared crises to viruses: "Having vaccinated everyone against whatever killed the last business cycle, they fail to spot the virus that infects the current one" (27). I knew most of the information covered in the book, but it still was refreshing to read it.
We must have been the only kids in town whose weekly allowance was indexed to inflation (xxi).
Every business expansion eventually dies. Only the cause of death changes (23).
A central banker with dovish tendencies is like a wine critic who drinks Merlot out of a box. Nothing wrong with it, but best kept behind closed doors (148).
(Money Quote) In Parliamentary systems, ... the Prime Minister draws up a budget and Parliament passes it. It's like a steak: a solid cut of meat that changes little between the cow and the dinner plate. The United States' budget is more like a sausage, a mixture of ground meat from different parts of the animal stuffed into a misshapen skin (183).
... in 1947, finance accounted for 2.3 percent of GDP. By 2005, it was almost 8 percent. That's an awful lot of cake, and a lot of it was just sugary icing with no nutritional value: leveraged buyouts, speculative stock trading, and financial engineering whose pain purpose was to layer on more bets (213).
June 9, 2014
Suffers from a serious problem of masquerading as a relatively objective introduction, while the author seemingly can't help but interject his own biases. On several occasions, it is gallingly easy to spot examples of him framing something that worked well for an economy with a description of "free market," even though such a nebulous thing only exists in abstraction (and for which he never bothers to give a meaningful definition). Meanwhile, as quickly as a couple of sentences later when describing something bad that happened to the economy that could just as easily be described as being a product of the mythical "free market" to which he often refers, he'll avoid this descriptive phrasing in order to condition the reader into thinking that such an alleged "free market" couldn't have negative consequences.
He also frequently makes off-hand remarks that would likely breeze by unnoticed in many cases, but which would actually really need a citation, such as claims about the Affordable Care Act's popularity (or rather claiming the lack thereof), which has demonstrated far from clear and consistent popularity in polling. In some cases, these oversights are relatively harmless. In others, it makes me skeptical of the author's intentions and professionalism.
When talking about clearcut issues of fact, Ip does a fine job of explaining, but it seems to me that there is more editorializing than either the author intended or than this kind of introductory book should really contain.
He also frequently makes off-hand remarks that would likely breeze by unnoticed in many cases, but which would actually really need a citation, such as claims about the Affordable Care Act's popularity (or rather claiming the lack thereof), which has demonstrated far from clear and consistent popularity in polling. In some cases, these oversights are relatively harmless. In others, it makes me skeptical of the author's intentions and professionalism.
When talking about clearcut issues of fact, Ip does a fine job of explaining, but it seems to me that there is more editorializing than either the author intended or than this kind of introductory book should really contain.
May 13, 2011
OK, this slim volume could be called Economics for Dummies. It tackles a bewilderlingly complex and arcane subject and tries to boil it down to a few simple essentials. No small task, especially for a little book. If you know any economics, it's probably too simple and you will probably disagree with parts of it. If know nothing about economics except that it's sometimes referred to as "the dismal science," it will probably make the subject seem a little less dismal. But it will also leave you thinking it's not a science at all.
That's not to say that it doesn't achieve its objective. At times, it actually makes what can be a dry and boring subject interesting. The material is clearly presented, but clearly the subject matter is confusing and often contradictory. Hence, my favorite part of this book was the joke about the President who said he was going to start hiring only one armed people to be his economic advisors because all the ones he had so far kept following the advice they gave by saying "on the other hand..."
That's not to say that it doesn't achieve its objective. At times, it actually makes what can be a dry and boring subject interesting. The material is clearly presented, but clearly the subject matter is confusing and often contradictory. Hence, my favorite part of this book was the joke about the President who said he was going to start hiring only one armed people to be his economic advisors because all the ones he had so far kept following the advice they gave by saying "on the other hand..."
March 5, 2014
At first, I thought this book might be a good refresher on economics. However, it was much more overtly political than I had hoped it would be. It seems that most economists cannot help but intersperse their opinions throughout the text. For someone who knows little about economics, this might be a bit over your head. For someone who deals in the business and finance world on a daily basis, as I do, this is not really a good refresher. I couldn't say I learned much - I had hoped for more stories to illustrate of macro and micro economic principles with less opinions from the author. I'm not saying I didn't agree with Mr. Ip's opinions, I'm just saying the book would have been better without them.
November 21, 2016
This was a good summary of economics concepts, and I thought there were some pretty good examples and metaphors that helped to clarify the ideas. I can't say that I understood everything, but I understand more about economics than I did before reading this book, which I figure is a win. This seems like a good reference book for general terms and concepts.
July 21, 2016
Reading in economics is never a load of fun, but I've had to give economics lectures a half-dozen times now and have come away from each one wishing I had a better way of boiling the subject down. Greg Ip's book does that amazingly well, and I'll definitely be recommending it to my students.
April 9, 2025
[This review originally appeared on my Substack blog, God.Sex.Politics. (https://godsexpolitics.substack.com/) at: https://godsexpolitics.substack.com/p...]
With President Trump’s tariffs—and the resulting plunge in the stock markets—dominating the news, I was curious to learn more about the subject of tariffs. So I looked up the titles of some books on the topic—and then (being cheap) checked to see if any of them were available at my local public library.
Unfortunately, none of the tariff-specific books were in the library catalog—but one more general book on economics was, so I decided to check it out. The Little Book of Economics is by journalist Greg Ip. I’ll focus this review on the one chapter he devoted to international trade (Chapter 6, pp. 85-101).
Trump’s “Reciprocal Tariffs” Are Not
President Trump described his new tariffs on various countries as being “reciprocal” tariffs—that is, we will charge them what they charge us. But as soon as the new tariffs were announced—complete with a detailed chart purporting to show their “reciprocal” nature—economists knowledgeable about tariffs said that the figures shown on the chart did not, in fact, represent “tariffs” charged by other countries.
A “tariff” is a tax a country charges on the value of goods it purchases from another country. The figures on Trump’s chart were calculated largely on the basis of the size of the trade “deficit” with each country. If a country sells more goods to the United States (U.S. imports) than that country buys from the United States (U.S. exports), that is called a “trade deficit.” President Trump, however, called it a “tariff”—even though it’s not. (The chart actually described these as “Tariffs Charged to the U.S.A.” and added in smaller letters “Including Currency Manipulation and Trade Barriers.”)
So the premise of the Trump policy is not “we charge them in tariffs what they charge us in tariffs” (even though that’s how he has described it). The real premise of the Trump policy is, “Imports are bad, exports are good.”
Would You Give Up Your Imports?
Author Greg Ip (writing in 2010, years before Trump ran for president) comments on this attitude:
We usually think the benefit of international trade is more exports. But that’s a blinkered view. Imports are just as important, perhaps more important, because they enrich consumers. Think of all the things you’d forsake if borders were closed: fresh fruit and tropical flowers in the dead of winter, . . . Harry Potter novels, . . . Hyundais.
Maybe check your own house to see where the things you buy come from.
As I write this, I am wearing a shirt and slacks that were both made in Bangladesh, and a belt made in India. My paper clips are in a holder made in Taiwan. My old-fashioned paper calendar was made in Vietnam. I have some candy in my desk drawer that was made in Germany. Both my favorite brands of highlighters were made in Mexico. My stapler, electric pencil sharpener, desk lamp, portable handheld scanner, and printer/copier were all made in China—as was the new iPhone I just got a few weeks ago. (I do have a three-hole punch that was made in the U.S.A.) And oh yes—my wife and I drive a Hyundai, which comes from Korea.
Would you really be willing to give up all the things you have “imported” from other countries—or pay, say, twice as much for a replacement made domestically?
Ip goes on to summarize,
To economists, the benefits of both exports and imports are so obvious that it’s one of the few things this notoriously fractious profession agrees on. . .
Global trade is one of the great economic success stories. One study . . . estimates the average American household is some $10,000 per year richer thanks to the post-war expansion of trade.”
My Favorite Econ Lesson—“The Law of Comparative Advantage”
I was an Economics major in college (but I have not used that training much since, so I don’t claim to be an expert). One lesson I learned in an Econ class, though, made such an impression that it has stuck with me ever since. So I was glad to see that Ip actually referred to the law of “comparative advantage.” Although less well-known than “the law of supply and demand,” the law of comparative advantage is just as important—at least when it comes to understanding international trade.
You see, one concern some Americans (and President Trump) may have is that if other countries can make virtually every product more cheaply than Americans do, then we will end up importing everything and manufacturing and exporting nothing, leaving Americans with little to do to make a living except flip one another’s burgers. The law of “comparative advantage” explains why this is not the case.
China’s Widgets, America’s Gadgets
Suppose, for example, that there are only two trading partners—China and the U.S.—and only two products that anyone needs to buy. We’ll call them “gadgets” and “widgets.” And suppose that China is capable of producing gadgets at half the cost of American producers, and is also capable of producing widgets at only a tenth of the cost of American producers.
The law of comparative advantage explains why, under this scenario, the policy that would lead to the greatest prosperity for both countries would be for China to produce the world’s widgets and for the U.S. to produce the world’s gadgets (and not for China to produce everything). This is because, although China has an absolute advantage in the production of both goods, its “comparative” advantage is greater in producing widgets; and while the U.S. is at an absolute disadvantage in producing both products, it still has a “comparative advantage” in the production of gadgets (as opposed to widgets). China also needs American consumers to be able to make a living, so that they can buy the things that China does produce.
There is math that you can do to prove that this is the case, and I found it quite amazing when I was an introductory Econ student. Ip describes the same principle without using math:
Countries even benefit by importing something they could make themselves. Why do parents hire a nanny when they could stay home and raise the child themselves? Because it lets them earn the money to buy a nicer home and send the child to college. The same principle of comparative advantage is why rich countries buy toys and clothing from poor countries: so that their own workers can earn more building aircraft, conducting heart bypass operations, or making movies.
The Politics of Trade
Ip does explain, though, why politicians often resist free trade even though economists usually support it:
Free trade is a tough sell because its benefits are less obvious than its costs. Imports make the majority of consumers better off, but they seldom know or care, whereas companies and workers that lose their livelihoods to imports are quick to let their representatives in Congress know. . . .
Before World War II, protectionism was the stated preference of Republican presidents [note how Trump has expressed admiration for William McKinley], which is why Herbert Hoover signed into law the Smoot-Hawley Tariff Act in 1930. It raised tariffs on thousands of products and triggered outrage and, in some cases, retaliation from other countries. Global trade was already collapsing, but Smoot-Hawley accelerated the process [and thus deepened the Great Depression].
Ip includes one paragraph that probably comes close to explaining the rationale behind the Trump tariffs:
Trade does not make Americans collectively poorer, but it does alter the balance between winners and losers. In the case of the iPod [this was written in 2010; substitute “iPhone” and the principle is the same], the winners, besides Americans who buy iPods, are clearly Steve Jobs and Apple’s employees. . . . The losers are the people who may have assembled iPods in the United States but can’t compete with the low wages paid to factory workers in China. Trade can thus aggravate inequality, eroding wages for formerly middle-class workers while rewarding those at the top. [Indeed, the box for my new iPhone 16e highlights this—it says it was “Designed by Apple in California” but “Assembled in China.”]
Presidents Were More Responsible—Until . . .
Ip notes that one reaction to the Smoot-Hawley tariff disaster was that in 1934, after Franklin Roosevelt became president,
Congress passed the Reciprocal Trade Agreements Act. It shifted responsibility for trade policy to the president who is less susceptible to narrow, protectionist interests and more likely to see trade agreements as a foreign policy bargaining chip.
At least, it seemed like the president would be “less susceptible [than Congress] to narrow, protectionist interests” until Donald Trump became president. (Whether he is open to using his tariffs “as a foreign policy bargaining chip” is something that seems to swing back and forth by the day.)
As you may guess, I think that on balance free trade is to be preferred to protectionism, and thus that the Trump tariffs are a bad idea. The subtitle of Ip’s chapter in international trade is, “The Globalization Game Is Here Whether We’re Ready or Not.”
From the Rink to the Parking Lot
The main title of the chapter, though, is “Drop the Puck!” Where does that come from? Ip says this:
World trade is like hockey: fights are inevitable, but they’re more dangerous when the players leave the rink and settle matters in the parking lot. Like the referee who hands out the penalties and lets the game continue, the WTO [World Trade Organization] gives countries an impartial venue to settle their trade disputes rather than mixing it up in the parking lot.
In all the talk about Trump’s tariff policy, we’ve heard very little about the WTO. It seems like Donald Trump is determined to mix it up in the parking lot.
With President Trump’s tariffs—and the resulting plunge in the stock markets—dominating the news, I was curious to learn more about the subject of tariffs. So I looked up the titles of some books on the topic—and then (being cheap) checked to see if any of them were available at my local public library.
Unfortunately, none of the tariff-specific books were in the library catalog—but one more general book on economics was, so I decided to check it out. The Little Book of Economics is by journalist Greg Ip. I’ll focus this review on the one chapter he devoted to international trade (Chapter 6, pp. 85-101).
Trump’s “Reciprocal Tariffs” Are Not
President Trump described his new tariffs on various countries as being “reciprocal” tariffs—that is, we will charge them what they charge us. But as soon as the new tariffs were announced—complete with a detailed chart purporting to show their “reciprocal” nature—economists knowledgeable about tariffs said that the figures shown on the chart did not, in fact, represent “tariffs” charged by other countries.
A “tariff” is a tax a country charges on the value of goods it purchases from another country. The figures on Trump’s chart were calculated largely on the basis of the size of the trade “deficit” with each country. If a country sells more goods to the United States (U.S. imports) than that country buys from the United States (U.S. exports), that is called a “trade deficit.” President Trump, however, called it a “tariff”—even though it’s not. (The chart actually described these as “Tariffs Charged to the U.S.A.” and added in smaller letters “Including Currency Manipulation and Trade Barriers.”)
So the premise of the Trump policy is not “we charge them in tariffs what they charge us in tariffs” (even though that’s how he has described it). The real premise of the Trump policy is, “Imports are bad, exports are good.”
Would You Give Up Your Imports?
Author Greg Ip (writing in 2010, years before Trump ran for president) comments on this attitude:
We usually think the benefit of international trade is more exports. But that’s a blinkered view. Imports are just as important, perhaps more important, because they enrich consumers. Think of all the things you’d forsake if borders were closed: fresh fruit and tropical flowers in the dead of winter, . . . Harry Potter novels, . . . Hyundais.
Maybe check your own house to see where the things you buy come from.
As I write this, I am wearing a shirt and slacks that were both made in Bangladesh, and a belt made in India. My paper clips are in a holder made in Taiwan. My old-fashioned paper calendar was made in Vietnam. I have some candy in my desk drawer that was made in Germany. Both my favorite brands of highlighters were made in Mexico. My stapler, electric pencil sharpener, desk lamp, portable handheld scanner, and printer/copier were all made in China—as was the new iPhone I just got a few weeks ago. (I do have a three-hole punch that was made in the U.S.A.) And oh yes—my wife and I drive a Hyundai, which comes from Korea.
Would you really be willing to give up all the things you have “imported” from other countries—or pay, say, twice as much for a replacement made domestically?
Ip goes on to summarize,
To economists, the benefits of both exports and imports are so obvious that it’s one of the few things this notoriously fractious profession agrees on. . .
Global trade is one of the great economic success stories. One study . . . estimates the average American household is some $10,000 per year richer thanks to the post-war expansion of trade.”
My Favorite Econ Lesson—“The Law of Comparative Advantage”
I was an Economics major in college (but I have not used that training much since, so I don’t claim to be an expert). One lesson I learned in an Econ class, though, made such an impression that it has stuck with me ever since. So I was glad to see that Ip actually referred to the law of “comparative advantage.” Although less well-known than “the law of supply and demand,” the law of comparative advantage is just as important—at least when it comes to understanding international trade.
You see, one concern some Americans (and President Trump) may have is that if other countries can make virtually every product more cheaply than Americans do, then we will end up importing everything and manufacturing and exporting nothing, leaving Americans with little to do to make a living except flip one another’s burgers. The law of “comparative advantage” explains why this is not the case.
China’s Widgets, America’s Gadgets
Suppose, for example, that there are only two trading partners—China and the U.S.—and only two products that anyone needs to buy. We’ll call them “gadgets” and “widgets.” And suppose that China is capable of producing gadgets at half the cost of American producers, and is also capable of producing widgets at only a tenth of the cost of American producers.
The law of comparative advantage explains why, under this scenario, the policy that would lead to the greatest prosperity for both countries would be for China to produce the world’s widgets and for the U.S. to produce the world’s gadgets (and not for China to produce everything). This is because, although China has an absolute advantage in the production of both goods, its “comparative” advantage is greater in producing widgets; and while the U.S. is at an absolute disadvantage in producing both products, it still has a “comparative advantage” in the production of gadgets (as opposed to widgets). China also needs American consumers to be able to make a living, so that they can buy the things that China does produce.
There is math that you can do to prove that this is the case, and I found it quite amazing when I was an introductory Econ student. Ip describes the same principle without using math:
Countries even benefit by importing something they could make themselves. Why do parents hire a nanny when they could stay home and raise the child themselves? Because it lets them earn the money to buy a nicer home and send the child to college. The same principle of comparative advantage is why rich countries buy toys and clothing from poor countries: so that their own workers can earn more building aircraft, conducting heart bypass operations, or making movies.
The Politics of Trade
Ip does explain, though, why politicians often resist free trade even though economists usually support it:
Free trade is a tough sell because its benefits are less obvious than its costs. Imports make the majority of consumers better off, but they seldom know or care, whereas companies and workers that lose their livelihoods to imports are quick to let their representatives in Congress know. . . .
Before World War II, protectionism was the stated preference of Republican presidents [note how Trump has expressed admiration for William McKinley], which is why Herbert Hoover signed into law the Smoot-Hawley Tariff Act in 1930. It raised tariffs on thousands of products and triggered outrage and, in some cases, retaliation from other countries. Global trade was already collapsing, but Smoot-Hawley accelerated the process [and thus deepened the Great Depression].
Ip includes one paragraph that probably comes close to explaining the rationale behind the Trump tariffs:
Trade does not make Americans collectively poorer, but it does alter the balance between winners and losers. In the case of the iPod [this was written in 2010; substitute “iPhone” and the principle is the same], the winners, besides Americans who buy iPods, are clearly Steve Jobs and Apple’s employees. . . . The losers are the people who may have assembled iPods in the United States but can’t compete with the low wages paid to factory workers in China. Trade can thus aggravate inequality, eroding wages for formerly middle-class workers while rewarding those at the top. [Indeed, the box for my new iPhone 16e highlights this—it says it was “Designed by Apple in California” but “Assembled in China.”]
Presidents Were More Responsible—Until . . .
Ip notes that one reaction to the Smoot-Hawley tariff disaster was that in 1934, after Franklin Roosevelt became president,
Congress passed the Reciprocal Trade Agreements Act. It shifted responsibility for trade policy to the president who is less susceptible to narrow, protectionist interests and more likely to see trade agreements as a foreign policy bargaining chip.
At least, it seemed like the president would be “less susceptible [than Congress] to narrow, protectionist interests” until Donald Trump became president. (Whether he is open to using his tariffs “as a foreign policy bargaining chip” is something that seems to swing back and forth by the day.)
As you may guess, I think that on balance free trade is to be preferred to protectionism, and thus that the Trump tariffs are a bad idea. The subtitle of Ip’s chapter in international trade is, “The Globalization Game Is Here Whether We’re Ready or Not.”
From the Rink to the Parking Lot
The main title of the chapter, though, is “Drop the Puck!” Where does that come from? Ip says this:
World trade is like hockey: fights are inevitable, but they’re more dangerous when the players leave the rink and settle matters in the parking lot. Like the referee who hands out the penalties and lets the game continue, the WTO [World Trade Organization] gives countries an impartial venue to settle their trade disputes rather than mixing it up in the parking lot.
In all the talk about Trump’s tariff policy, we’ve heard very little about the WTO. It seems like Donald Trump is determined to mix it up in the parking lot.
February 20, 2020
A concise book on economics designed for the layman. While I had a basic understanding of market forces and international economics prior to reading this, I enjoyed learning about the various U.S. government regulative agencies that exist and their influence or more maybe more importantly their ability to be influenced. Written shortly after the time of the 2008 recession and bailout, this book has some political flavor.
March 11, 2021
3.5★
Covers most of macro. Written mostly from US's pov. Need some basic understanding of economic terms to read this.
Covers most of macro. Written mostly from US's pov. Need some basic understanding of economic terms to read this.
July 20, 2021
Always regretted not studying Econs in JC.. this was quite a good introduction!
Read
September 20, 2024my grandmother gave this to me
October 31, 2010
I've read enough of these books now that I feel mostly confident saying this is a book about macroecominics-- which means, mostly, that there really isn't much math (which is good and bad), no demand curves and things like that. This means that there's none of that sexy freakanomics-behavioral economics that I think attracted me at first about these pop-economics stuff.
That said, this book is good at understanding how all the different reports you hear about on NPR fit together, and how the information those reports contain affect public policy-- it is overall a very lucid precis of the economy on a national level, and is really impressive for peeling back the layers of all these elements of the economy, writ large, and how they fit together.
I did miss the hesitation I found in more academic treatments of economics: Ip has no problem saying that gov't intervention is a problem for economic growth, without any concession that without intervention, we'd have five year olds sorting sausages in a meat packing plant. That felt a little odd to me, but it also made me think that this is a book my colleagues in the business college would recognize and respect. There's something to be said for that.
I think, ultimately, this doesn't do quite enough to reach out to non-economists, or maybe more accurately non-free market boosters. But it is what it is, and at least it's a window into a world I otherwise don't really see.
That said, this book is good at understanding how all the different reports you hear about on NPR fit together, and how the information those reports contain affect public policy-- it is overall a very lucid precis of the economy on a national level, and is really impressive for peeling back the layers of all these elements of the economy, writ large, and how they fit together.
I did miss the hesitation I found in more academic treatments of economics: Ip has no problem saying that gov't intervention is a problem for economic growth, without any concession that without intervention, we'd have five year olds sorting sausages in a meat packing plant. That felt a little odd to me, but it also made me think that this is a book my colleagues in the business college would recognize and respect. There's something to be said for that.
I think, ultimately, this doesn't do quite enough to reach out to non-economists, or maybe more accurately non-free market boosters. But it is what it is, and at least it's a window into a world I otherwise don't really see.
September 20, 2011
quick read. Great book for people who know little about economics. A bit advanced for the teabaggers.
July 1, 2016
الكتاب معقد جدا ويصلح للمختصين في مجال الاقتصاد وليس للقاريء العادي الذي لايملك خلفية عن هذا المجال
February 16, 2015
The economy is big and scary and I want nothing to do with it.
April 11, 2021
While not a long book, this one is a winner. The author provides a quality review of economics and since it was published about eight years ago, it isn’t impacted by current politics. Thought it was a good review of economics principles I already knew, as well as providing me clarity on things of which I wasn’t fully aware. A good read of which I spent some extra time working through to ensure maximum retention. Key excerpts below.
- Who do some countries grow and some stagnate? … growth rests on two building blocks: population and productivity. P6.
- As women have fewer children, more of them go to work. This demographic dividend delivers a one-time kick to economic growth. P7. PJK: never thought about this before. Certainly makes sense.
- The productive power of ideas is nothing short of miraculous. Investing in more buildings and machines costs money. But a new idea can be reproduced endlessly for free. P10.
- Still, once a country has copied all the ideas it can, future growth depends on waiting for new ideas or developing its own. Inevitably, a country at the technological frontier grows more slowly than the one catching up to the frontier. P13.
- Rule of law. Investors will invest today only if they know they get to keep the rewards years later. That requires transparent laws, impartial courts, and the right to property. P14. PJK: so true. Saw a lack of rule of law in Iraq and Afghanistan. War/Civil War is never good. A country needs a functioning judiciary to advance itself.
- Democracy provides essential feedback to government just as free markets do to companies, and elections are generally less disruptive than civil wars. P15.
- Every business expansion eventually dies. Only the cause of death changes. P28.
- Depressions occur when the economy’s normal recuperative mechanism fails to engage. P32.
- Trade makes the U.S. as whole richer. But the benefits are not shared equally. … the biggest gainers will be the highest skilled workers while those with the least skills will see their wages erode. P110.
- Debt isn’t evil: There’s nothing wrong with the government borrowing to finance an investment, such as a highway, that pays off long into the future. But debt taken on to finance current consumption is simply a transfer to today’s citizens from tomorrow’s taxpayers who must pick up the tab, with interest. P222.
- Who do some countries grow and some stagnate? … growth rests on two building blocks: population and productivity. P6.
- As women have fewer children, more of them go to work. This demographic dividend delivers a one-time kick to economic growth. P7. PJK: never thought about this before. Certainly makes sense.
- The productive power of ideas is nothing short of miraculous. Investing in more buildings and machines costs money. But a new idea can be reproduced endlessly for free. P10.
- Still, once a country has copied all the ideas it can, future growth depends on waiting for new ideas or developing its own. Inevitably, a country at the technological frontier grows more slowly than the one catching up to the frontier. P13.
- Rule of law. Investors will invest today only if they know they get to keep the rewards years later. That requires transparent laws, impartial courts, and the right to property. P14. PJK: so true. Saw a lack of rule of law in Iraq and Afghanistan. War/Civil War is never good. A country needs a functioning judiciary to advance itself.
- Democracy provides essential feedback to government just as free markets do to companies, and elections are generally less disruptive than civil wars. P15.
- Every business expansion eventually dies. Only the cause of death changes. P28.
- Depressions occur when the economy’s normal recuperative mechanism fails to engage. P32.
- Trade makes the U.S. as whole richer. But the benefits are not shared equally. … the biggest gainers will be the highest skilled workers while those with the least skills will see their wages erode. P110.
- Debt isn’t evil: There’s nothing wrong with the government borrowing to finance an investment, such as a highway, that pays off long into the future. But debt taken on to finance current consumption is simply a transfer to today’s citizens from tomorrow’s taxpayers who must pick up the tab, with interest. P222.
December 27, 2019
This was pretty decent for a short introduction to the subject. It was published not long after the 2008 financial crisis, so I could appreciate that it examined most topics in light of this massive upheaval instead of trying for a more detached and comprehensive approach.
I'm not knowledgeable about economics (why else would I read this?), so I can't very well analyze the author's biases and omissions. I did sometimes feel that he asserted or denied propositions off-hand when his position required more explanation. I don't feel like I understand a subject unless I know about competing points of view, so I didn't love how easily he would, say, dismiss the usefulness of fiscal stimulus without addressing its role in Keynesian theory.
Sometimes this was a bit opaque to me despite the ease of reading. But I'm grateful to have received this overview of the economy, and I think that it contextualized some things for me that will make it easier to learn about economics moving forward.
I'm not knowledgeable about economics (why else would I read this?), so I can't very well analyze the author's biases and omissions. I did sometimes feel that he asserted or denied propositions off-hand when his position required more explanation. I don't feel like I understand a subject unless I know about competing points of view, so I didn't love how easily he would, say, dismiss the usefulness of fiscal stimulus without addressing its role in Keynesian theory.
Sometimes this was a bit opaque to me despite the ease of reading. But I'm grateful to have received this overview of the economy, and I think that it contextualized some things for me that will make it easier to learn about economics moving forward.
May 9, 2017
Complex financial terms and ideas explained in simple human language. From GDP, inflation, deflation, hyperinflation, indexes, business cycles, employment, natural unemployment, non accelerating inflation rate of unemployment, average salary, WTO, subsidy, dumping, budget deficit, fixed exchange rate, NEC, OMB, CEA, Fed, OCC, The Office of Thrift Supervision, FDIC, SEC, CFTC, FTC, monetary accommodation to manias, panics and crashes, VAT, national debt, Ginnie Mae, Fannie Mae, Freddie Mac, capital, liquidity, insolvency, stocks, bonds, credit default swaps and other types of derivatives. Author uses creative analogies, metaphors and real stories to captivate attention of his audience.
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January 16, 2023Other than a small spattering of terms and concepts that were never explained in the slightest, I sure got the feeling that I was being walked through the workings of the economy in a straightforward way I could understand. But somehow my brain continued to slide right off every sentence about derivatives, money markets, interest rates, illiquidity, "propping up" a currency, quantitive easing and on and on, until I'm pretty sure I understand exactly as much as i did 240 pages ago.
September 24, 2018
I'm not sure who this book is for. It's both too cursory and too specific. If you've studied economics, it's an ok reminder. But if you've forgotten any of the more complicated concepts, this book moves too quickly through subjects to teach you. I liked the book well enough, but I can't think of many people to whom I'd recommend it.
July 19, 2023
Economics is not an exact science, and this leaves a lot of room for bias in any book on Economics. All that you need to know about this author is summed up in this sentence from the Introduction.
"Recovering from a financial crisis can be hastened if the government buys up private borrowers' bad debts and makes them less onerous."
"Recovering from a financial crisis can be hastened if the government buys up private borrowers' bad debts and makes them less onerous."
March 30, 2018
A great book on economics. It covered different recessions, the Great Depression and other financial disasters. It greatly explains the different government organizations that effect the US economy. It presented the info in an entertaining way.
November 9, 2018
Accessible overview of macroeconomics in plain language. A bit outdated since Quantitative Easing and a change in the reserve interest rate are now in play as policy options, but still a great book to start with before jumping into this area of study.
June 9, 2021
An excellent primer to the American economy and the forces that drive it. I wish I would've listened to this back when I took my Economics class. Ip explains his concepts in an easy to understand method. Albeit a bit dated, his use of historical examples reinforces his lessons. The "bottom line" at the end of each chapter are helpful in summarizing the concepts introduced.
January 5, 2023
Really great basic overview of Econ. I couldn’t finish it though because Econ as a subject is so boring to me, but it had nothing to do with the book. If you are actually interested in economics, this is a fantastic first place to start.
July 19, 2023
For someone who knows nothing about economics, this was a an easy ready to help me understand how our economy works. My favorite part about the book is that it wasn’t boring, I actually was intrigued to learn more after each chapter!
November 24, 2024
Definitely of its time -- lots of mentions of macro economics up to 2010, but seems glaringly out of date by not mentioning everything that's happened since then. Still, I learned a lot. A good primer for anyone who doesn't have an econ background who wants to understand more about global markets.
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