Usually when an Economics book claims to condense core ideas into a short frame, it is best for the reader to be on the...more 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 ex[lain 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 an 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.
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.
• 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.
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:
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.
• 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?
• 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.)
• 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.
(view spoiler)[Well, it is not as if there are minutely exact parallels, but rough parallels are all over the place. Martin takes events from across English history and sticks them together to serve his plot. A murder-by-pushing from Elizabeth’s time might be stringed together with an usurper’s story from early 12th Century, and so on. So it is not that you will completely ruin your viewing/reading pleasure (btw, since interesting things to read far outstrips good TV material, it might be a better strategy to just go with the series and avoid the books, esp since it is more or less certain that Martin is not going to be able to finish the series), it is just that the overall thrust of the series becomes much more predictable, and you start to get a sense of who has to die and when the next generation has to take over, etc.
It is subtle, but knowing too much history is injurious to GoT fandom. (hide spoiler)]["br"]>["br"]>["br"]>["br"]>["br"]>(less)
The book is primarily directed at building a model for combating poverty by tackling them at the earliest level of per...more Building High-Achieving Schools
The book is primarily directed at building a model for combating poverty by tackling them at the earliest level of perpetuation - in schools.
Schools, Payne advocates, should be our first line of defense against encroaching poverty and also our most effective weapon to beat it back. Unlike most economic tools, schools can be fine-tuned and deployed according to strict frameworks.
The thrust is thus primarily on how to deal with poverty in schools and how to equip the students with tools and education to fight their way out of it.
For this teachers have to understand what poverty is and the disadvantages that characterize poverty — these are usually classed as inherent problems of the students, instead they have to be reframed as disadvantages that are the duty of the teachers to correct in any decent school environment.
The ‘Framework’ in the title is then a Framework for the Teachers.
A Framework For Teachers
Payne uses what he calls an ‘Additive Model’, implicit throughout this book, as a vital tool for better understanding and addressing poverty, as well as the underlying factors that perpetuate it.
Some of the most important aspect of the Model are:
1. Identifies the mindsets and patterns that individuals use to survive different economic environments-and provides a vocabulary to talk about it.
2. Identifies strengths and resources already found in the individual, family, school, and community-and adds new information and a new perspective for creating and growing resources.
3. Offers economic diversity as a prism through which individuals and schools can analyze and respond to their issues.
4. Identifies skills, theories of change, program designs, partnerships, and ways of building schools where students achieve.
5. Encourages the development of strategies to respond to all causes of poverty.
Poverty & Its Baggages
An individual brings with him/her the hidden rules of the class in which he/she was raised. Even though the income of the individual may rise significantly, many of the patterns of thought, social interaction, cognitive strategies, etc., remain with the individual.
Schools and businesses operate from middle-class norms and use the hidden rules of middle class. These norms and hidden rules are not directly taught in schools or in businesses.
For our students to be successful, we must understand their hidden rules and teach them the rules that will make them successful at school and at work. We can neither excuse students nor scold them for not knowing; as educators we must teach them and provide support, insistence, and expectations.
Out of Poverty: A Resource-Kit
To move from poverty to middle class or middle class to wealth, an individual must give up relationships for achievement (at least for some period of time). Two things that help one move out of poverty are:
a. Education and
Leaving poverty could indeed be a conscious exercise. Four reasons one chooses to leave poverty are:
1. It’s too painful to stay,
2. A vision or goal,
3. A key relationship, or
4. A special talent or skill.
Typically, poverty is thought of in terms of financial resources only. However, the reality is that financial resources, while extremely important, do not explain the differences in the success with which individuals leave poverty nor the reasons that many stay in poverty. The ability to leave poverty is more dependent upon other resources than it is upon financial resources. Each of these resources plays a vital role in the success of an individual:
1. FINANCIAL: Having the money to purchase goods and services.
2. EMOTIONAL: Being able to choose and control emotional responses, particularly to negative situations, without engaging in self-destructive behavior. This is an internal resource and shows itself through stamina, perseverance, and choices.
3. MENTAL: Having the mental abilities and acquired skills (reading, writing, computing) to deal with daily life.
4. SPIRITUAL: Believing in divine purpose and guidance.
5. PHYSICAL: Having physical health and mobility.
6. SUPPORT SYSTEMS: Having friends, family, and backup resources available to access in times of need. These are external resources.
7. RELATIONSHIPS/ROLE MODELS: Having frequent access to adult(s) who are appropriate, who are nurturing to the child, and who do not engage in self-destructive behavior.
8. KNOWLEDGE OF HIDDEN RULES: Knowing the unspoken cues and habits of a group.
The education system should be able to equip the students with these vital resources.
Knowledge Of Hidden Rules
This aspect might sound a bit esoteric and bears illumination with a couple of examples:
1. The importance of Socially Accepted Language:
All the state testsSAT, ACT, etc. are require an understanding of formal language (called ‘the formal register’). It is further complicated by the fact that to get a well-paying job, it is expected that one will be able to use formal register. Ability to use formal register is a hidden rule of the middle class. The inability to use it will knock one out of an interview in two or three minutes. The use of formal register, on the other hand, allows one to score well on tests and do well in school and higher education.
This use of formal register is further complicated by the fact that these students do not have the vocabulary or the knowledge of sentence structure and syntax to use formal register. When student conversations in the casual register are observed, much of the meaning comes not from the word choices, but from the non-verbal assists. To be asked to communicate in writing without the non-verbal assists is an overwhelming and formidable task, which most of them try to avoid. It has very little meaning for them.
Another version of this is noticeable in educated people from the lower segments of society: They often they turn out too formal in their language. And thus cant function so well in intimate/casual social settings, which are also essential for career progression.
In a school setting this means that:
• Formal register needs to be directly taught.
• Casual register needs to be recognized as the primary discourse for many students.
• Students need to be told how much the formal register affects their ability to get a well-paying job.
• Students need to be told the importance of being adaptive in their registers.
2. The importance of learning to Manage Money:
One of the biggest difficulties in getting out of poverty is managing money and just the general information base around money. How can you manage something you've never had? Money is seen in poverty as an expression of personality and is used for entertainment and relationships. The notion of using money for security is truly grounded in the middle and wealthy classes.
The above are only a couple of simple examples, the reality is much more complex and requires much greater effort from the educational system.
Being in poverty is rarely about a lack of intelligence or ability. Many individuals stay in poverty because they don't know there is a choice-and if they do know that, have no one to teach them hidden rules or provide resources. Schools are virtually the only places where students can learn the choices and rules of the middle class.
Teachers must recognize a larger role: as Motivators + Educators + Enablers, so must the school system and the governments.
It is time we mobilized this important weapon in the fight against poverty.(less)
Philip Hans Franses takes the reader through the most elementary concepts of econometrics, or as much as is possible in such a s...more A Demonstrable Problem
Philip Hans Franses takes the reader through the most elementary concepts of econometrics, or as much as is possible in such a short book. This is well supplemented by a series of practical research questions in various economic disciplines, which are then ‘demonstrated’ for the reader by showing how they can be answered using econometric methods and models.
This makes the book a good introduction to the empirical practices of the ‘real’ econometric world, which, as the author takes pains to emphasize is slightly different from the typical text book assumed world where the data is reliable, the questions are already framed and the variables are not suspect, with only the modeling (even the models are often taken for granted in standard textbooks!) and the statistical tools occupying center stage.
This format of a typical econometrics textbook has its origin in a traditional view of econometrics, where the econometricians were supposed to match (mainly macro-) economic theories to data, often with an explicit goal to substantiate the theory. In the unlucky event that the econometric model failed to provide evidence in favor of the theory, it was usually perceived that perhaps the data were wrong or the estimation method was incorrect, implying that the econometrician could start all over again.
This view assumed that most aspects of a model, like the relevant variables, the way they are measured, the data themselves, and the functional form, are already available to the econometrician, and the only thing s/he needs to do is to fit the model to the data. The model components are usually assumed to originate from an (often macro-) economic theory, and there is great confidence in its validity.
A consequence of this confidence is that if the data cannot be summarized by this model, the econometric textbook first advises us to consider alternative estimation techniques. Finally, and conditional upon a successful result, the resultant empirical econometric model is used to confirm (and perhaps in some cases, to disconfirm) the thoughts summarized in the economic theory.
The author instead realizes that the most common refrain from newbie researches out in the field is “where do I start?” and takes his discussion forward from there. With this introduction that shows the process of econometric research in simplistic but essential detail, Franses makes sure that the student will be less clueless when confronting a possible opportunity to pose a useful question.
The most valuable chapter in the book (Chapter 4) addresses this problem even more directly and contains step-by-step discussion of sample research case studies. These are meant to indicate that the main ideas in the book shine through present-day applied econometrics. These illustrations suggest that there is a straight line from understanding how to handle the basic regression model to handling regime-switching models and a multinomial probit model, for example.
To conclude, I quote the concluding paragraph from the introduction, which I simply loved. It is a valuable economic exercise to indulge in, to strengthen the analytic muscles or even just to pass time!
Finally, as a way of examining whether a reader has appreciated the content of this book, one might think about the following exercise. Take a newspaper or a news magazine and look for articles on economic issues. In many articles are reports on decisions which have been made, forecasts that have been generated, and questions that have been answered. Take one of these articles, and then ask whether these decisions, forecasts, and answers could have been based on the outcomes of an econometric model. What kind of data could one have used? What could the model have looked like? Would one have great confidence in these outcomes, and how does this extend to the reported decisions, forecasts, and answers?