Sunday, April 27, 2014

The Undercover Economist Strikes Back: How to Run-or Ruin-an Economy

I enjoy Tim Harford's writing, especially his first book, "The Under Cover Economist" but was a bit reticent to get this one. Macroeconomics seems like something that we don't really have a good handle on yet, in many ways, a fact that is indeed acknowledged in the book, and it tends to be a bit more abstract than microeconomics.  However, I needn't have worried: the pleasant writing style makes the book a quick and pleasant read, and touches on a number of topics that are often encountered when reading about the economy and politics.  In this sense, the book is a pretty good tour of important topics in macroeconomics.  Having read this and that over the years, many the topics were not really new to me, but it was nice to see them covered in a fairly direct, neutral way rather than simply absorbing them in context.

While fairly neutral in terms of mainstream economics, the author is certainly opinionated:

The world is full of people who will tell you that there is. Tie your currency to gold! Always balance your budget! Protect manufacturing! Eliminate red tape! That kind of thing. You can safely ignore these people. Anyone who insists that running a modern economy is a matter of plain common sense frankly doesn’t understand much about running a modern economy.
This is probably the sort of opinion lost on the people who most ought to take it to heart, though.

"We don't have all the answers" is something that becomes quite clear in the book, but we do our best to keep improving on what we do know, and to use that effectively with regards to the economy.  You can't run experiments on an economy, except by accident, and there are always many confounding factors in play at one time, making it difficult to understand what is affecting what.  This is a difficulty microeconomics faces, but it's exacerbated by the scale that is the scope of macroeconomists.

Some topics touched upon include inflation, employment, central banks, labor markets, and inequality.  There is also a lengthy section of the book dedicated to defending the use of GDP to measure an economy, in that alternatives are mostly worse, and pushed as part of a political agenda.  Also, broadly, people who have more money are happier:
Justin Wolfers, told me that the relationship between life satisfaction and income is “one of the highest correlations you’ll ever see in a cross-country data set in the social sciences, ever.”
As a resident of Italy, with a first-hand view of the stagnant economy, the brief comment on the employment model here seems pretty obvious.... outside Italy at least:
What’s pretty clear is what doesn’t work: the Mediterranean model of Spain, Italy and Greece provides little help to young people and extravagant protection to people with permanent contracts.
The notion that failure is important for growth is also touched on:
But corporate failure isn’t the cause of economic trouble—it’s the process by which badly managed companies are replaced by more productive competitors.
This is something that often involves very difficult changes for those involved, but ultimately leads to a healthier, more productive economy.  The amount of money that Italy has sunk into Alitalia comes to mind.

The "but GDP growth can't continue forever!" argument is also faced:
I fully agree with the environmentalists who worry that we cannot continue consuming more and more water, spewing out more and more carbon dioxide and burning more and more coal. The problem comes if we then leap to the conclusion that the economy itself cannot keep growing. It doesn’t follow.


A lot of what’s going on with GDP growth is not that more materials are being used, but rather that much the same materials become more valuable as they are used in a better-designed object


The economy has been dematerializing: more and more of what we consume in rich countries requires fewer resources because of more efficient technology (LEDs instead of incandescent bulbs; laptops instead of mainframe computers), or because the value is mostly in the esthetic design (haute couture, haute cuisine), or even because—like the e-book you may be reading or the audiobook you downloaded—the product is digital and has almost no physical form at all
 If you're already familiar with macroeconomics, this book will be too basic, but for anyone else not familiar with the subject, I would happily recommend it.  The conversational style of the book, and the author's able writing make a good introduction to what could be a dry and boring subject in the wrong hands.

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