Naked Economics Wheelan, Charles (books to read for 13 year olds TXT) 📖

art and leisure and the sorrows of environmental destruction and stress.9 Measuring these elements of the human condition is a noble gesture—but a single number? The Wall Street Journal commented, “Chapeaus off to Messrs. Stiglitz and Sen if they can put a number on such spiritual matters—but don’t hold your breath.”

So you begin to see the problem. Any measure of economic progress depends on how you define progress. GDP just adds up the numbers. There is something to be said for that. All else equal, it is better for a nation to produce more goods and services than fewer. When GDP turns negative, the damage is real: jobs lost, businesses closed, productive capacity turned idle. But why should we ever have to deal with that anyway? Why should a modern economy switch from forward to reverse? If we can produce and consume $14 trillion worth of stuff, and put most Americans to work doing it, why should we toss a bunch of people out of work and produce 5 percent less the following year?

The best answer is that recessions are like wars: If we could prevent them, we would. Each one is just different enough from the last to make it hard to ward off. (Though presumably policymakers have prevented both wars and recessions on numerous occasions; it’s only when they fail that we notice.) In general, recessions stem from some shock to the economy. That is, something bad happens. It may be the collapse of a stock market or property bubble (the United States in 1929 and 2007, Japan in 1989); a steep rise in the price of oil (the United States in 1973); or even a deliberate attempt by the Federal Reserve to slow down an overheated economy (the United States in 1980 and 1990). In developing countries, the shock may come from a sudden fall in the price of a commodity on which the economy is heavily dependent. Obviously there may be a combination of causes. The American slowdown that began in 2001 had its roots in the “tech wreck”—the overinvestment in technology that ultimately ended with the bursting of the Internet bubble. That trouble was compounded by the terrorist attacks of September 11 and their aftermath.

No matter the cause, the most fascinating thing about recessions is how they spread. Let’s start with a simple one, and then work our way to the “Great Recession” of 2007. You probably didn’t notice, but around 2001 the price of coffee beans plunged from $150 to $50 per hundred pounds.10 Although that drop may have made your Starbucks latte habit modestly more affordable, Central America, a major coffeeproducing region, was reeling. The New York Times reported:

The collapse of the [coffee] market has set off a chain reaction that is felt throughout the region. Towns have been left to scrape by as tax receipts drop, forcing them to scale back services and lay off workers. Farms have scaled back or closed, leaving thousands of the area’s most vulnerable people with no money to buy food or clothes or to pay their rent. Small growers, in debt to banks and coffee processors who lent them money to care for the crops and workers, have been idled, and some of them are facing the loss of their land.

Whether you live in Central America or Santa Monica, someone else’s economic distress can become your problem very quickly. The recession of 2007 (which erupted into a financial crisis in 2008) has been the scariest in a long time. The economic “shock” in this case originated with sharp drops in both the stock and housing markets, both of which left American households poorer. Christina Romer, chair of President Obama’s Council of Economic Advisers, estimates that U.S. household wealth fell 17 percent between December 2007 and December 2008—five times the size of the decline in 1929 (when fewer families owned stocks or houses).11 When consumers sustain a shock to their income, they spend less, which spreads the economic damage. This is an intriguing paradox: Our natural (and rational) reaction to precarious economic times is to become more cautious with our spending, which makes our collective situation worse. The loss of confidence caused by a shock to the economy may turn out to be worse than the shock itself. My thrift—a decision to curtail my advertising budget or to buy a car next year instead of this year—may cost you your job, which will in turn hurt my business! Indeed, if we all believe the economy is likely to get worse, then it will get worse. And if we all believe it will get better, then it will get better. Our behavior—to spend or not to spend—is conditioned on our expectations, and those expectations can quickly become self-fulfilling. Franklin Delano Roosevelt’s admonition that we have “nothing to fear but fear itself” was both excellent leadership and good economics. Similarly, Rudy Giuliani’s exhortation that New Yorkers should go out and do their holiday shopping in the weeks after the World Trade Center attack was not as wacky as it sounded. Spending can generate confidence that generates spending that causes a recovery.

Unfortunately the Great Recession that began in 2007 had other aspects to it that spread the economic damage in virulent and scary ways. Many American households were “excessively leveraged,” meaning that they had borrowed far more than they could manage. The housing boom had encouraged ever bigger houses with ever bigger mortgages. Meanwhile, the down payments—the amount of their own money buyers had to spend to get a loan—were getting smaller relative to what was being borrowed. Subprime mortgages (a financial innovation, one must admit) made it easier for people to borrow who were otherwise not creditworthy and for other people to borrow in particularly aggressive ways (e.g., with no down payment at all). This all works fine when housing prices are going up; someone who falls behind on their mortgage payments can always sell the house to repay the loan. When the housing bubble burst,