The Undercover Economist Strikes Back
This cordial look at our recession's slow recovery has all the answers – and the questions to boot.
Economics is pretty boring at the best of times. When the system is humming along and most people are employed, subjects like interest rates, inflation, and financial stability seem dry to most. But in the midst of a grindingly slow recovery from the worst downturn since the Great Depression, the proportion of people that want a better understanding of how the whole thing works has grown; economic festivals have sprouted up in Europe, and global debt commentary has even bled into stand-up routines, if only at a rhetorical level.
Tim Harford's new explainer, The Undercover Economist Strikes Back, goes a good way toward meeting this need, serving as a lighthearted compendium of the main fault lines of disagreement in the famously contentious field of macroeconomics, while also making a good-faith effort to show the relative merits of different points of view. It's written in a breezy manner, employing the same conversational question-and-answer style that structured its predecessor "The Undercover Economist": "'Moderate inflation' sounds a bit like 'moderate pregnancy' to me," Harford quips.
The book is littered with pop culture and literary references located at the beginning of each chapter, including two particularly chuckle-worthy excerpts from Douglas Adams's "Hitchhiker's Guide to the Galaxy" and "The Restaurant at the End of the Universe," recounting the sad fates of the Alterian dollar and Flainian Pobble Beads and advising against using tree leaves as legal tender. This approach is good, because it helps dilute the two dominant emotions people associate with economics: tedium and dread.
Harford frames the book as "a determined and practically minded poke-around under the hood of our economic system ... to figure out whether there is anything we can do to make it work better." He does this by hypothetically placing readers in control of the world's economy, prompting them to find out for themselves how to accomplish the above goal. While "The Undercover Economist" focused on microeconomics (the study of the economic phenomena underlying everyday transactions and business decisions), the sequel is about economists' attempts to understand the big picture.
Accordingly, most of the chapters are devoted to large-scale economic phenomena: money, inflation, stimulus, output gaps, unemployment, and gross national product, while the remainder focus on the theories that tie these things together, anchored by the analogy of a "babysitting co-op recession" first popularized by Paul Krugman, and the "prison camp recession" analogy of the IMF economist Robert Radford.The former, about a dysfunctional babysitting co-op using homemade vouchers in Washington, D.C., is meant to illustrate the main idea of Keynesianism: without enough money circulating around, an otherwise functional economy can fail, while the latter example, a prison camp in World War II that ran out of Red Cross supplies, demonstrates the classical view that economic activity can often be attributed to "policy, or something called exogenous shocks. .. things, good or bad, that strike your economy from outside."
I read this book while on holiday in Cork City, Ireland, where the national unemployment rate is approximately 15 percent, and found myself looking at the city through the prism of the debate laid out by Harford. Were Cork's previous high growth and low unemployment rates entirely due to over-investment in the country's now-collapsed housing bubble? After that "exogenous shock," is the current situation the new normal? Or do the Keynesians have it right, and all that's needed is a bit of stimulus to get people spending money again? Harford treats both perspectives with respect, while remaining honest about his own biases, best summarized by this insight from his questioner: "It feels like what you're saying is that I should run my economy like a tough bastard right-winger during a boom, and like a bleeding-heart left-winger during a recession."
Harford's trick is to make his interlocutor the driver of the conversation, having them ask questions and draw conclusions that follow logically from the long explanatory passages written in his own voice. The formula's an excellent way to introduce and build upon unfamiliar concepts; at times I felt like I was reading an innovative, new kind of textbook. It must be said, however, that the suspension of disbelief is difficult to sustain sometimes, as when the fictional questioner offers a supernaturally astute interjection on the subject of output gaps (periods when the economy is operating below its potential): "Hang on – if you assume that output follows a smooth trend, then you are basically assuming that all recessions are Keynesian recessions." Though the format works very well for explaining complex economic concepts, it's hard to ignore that both sides of the conversation are essentially Harford, possessing both his intelligence and facility with economic logic.
Perhaps the most welcome aspect of "Undercover" is its intent to honestly highlight the limitations of the discipline with respect to outsiders' impressions. Harford states again and again that macroeconomists should not try to make forecasts: "You don't expect your dentist to forecast the pattern of tooth decay, but you expect that she will be able to give you good practical advice on dental health." By the end of this book, you'll have learned so much that you'll be just as confused as the experts – and anything but bored.