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Making Macro Manageable

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On the advice of one of the members of the little investment club I am a part of, I picked up David Moss’s book A Concise Guide to Macroeconomics. I wasn’t expecting much, having taken a few introductory economics courses in college and being a casual economics aficionado, but I gave it a shot.

And, I think that the subtitle “What Managers, Executives, and Students Need to Know” is simultaneously very appropriate and a dramatic underselling of the book. Moss’s writing style and his very direct, conclusion-oriented (as opposed to “scholarly”) overview of basic macroeconomics makes the book not only accessible to people who need a working understanding of economics but not the extra academic theory, but also a great reference.

Now, if you’re an economic genius, or have even just taken basic economics, then you’re not going to learn anything earthshattering from the book, but what you may get out of it which could be just as valuable is a different way of thinking through or of explaining macroeconomic concepts.

Case in point: I had never thought of “the job of a pension system is to divide national output between active workers and retirees.” While this is a simple and obviously true statement, Moss uses that underlying “framework” to explain why moving existing Social Security/pension plans to an IRA (stock-based) retirement system is unlikely to fundamentally solve anything:

Although all of us are accustomed to thinking that we can sell our financial assets for cash at a moment’s notice and then use the cash to buy goods and services, this obviously wouldn’t work if everyone tried to do it at once. If a large number of senior citizens liquidated their financial assets at the same time, in order to buy needed goods and services, they would soon find that the proceeds were much smaller than they had expected. Simply giving the elderly more pieces of paper – more stocks and bonds – does not guarantee that there will be more output for them to consume in the future …

The key question from a macroeconomic standpoint, therefore, is not whether the senior citizens of tomorrow have IRAs or traditional Social Security benefits, but whether they (or others) reduced their consumption to prepare for their eventual retirement. Unless savings are increased today, the division of output between active workers and retirees will be no less onerous tomorrow, regardless of whether we have a fully funded pension system based on individual accounts or a traditional pay-as-you-go system based on payroll taxes …

The amount of output a country produces is its ultimate budget constraint, regardless of how many stocks or bonds or Social Security cards may be floating around. Unless its output grows, a country cannot give more to its retirees without giving less to its workers.

Maybe you didn’t hear anything new there – and if so, pat yourself on the back as you are far smarter than I am – but I was blown away by the simplicity of Moss’s explanation of what is a very complicated problem. Mind you, he doesn’t have an answer to out-of-control entitlement programs like the one the US has, but being able to break this down only pages after explaining the different things that make up and affect GDP (national economic output) was impressive to me. And the cool thing is that Moss does this several times, explaining, for instance, why boosting monetary supply (i.e. when the Federal Reserve cuts interest rates) may have a certain effect on the exchange rate in the short-term but a different one in the long-term and how an “unsustainable current account deficit” (i.e. huge trade deficits) might look like a “high degree of investor confidence” at first.

If you’re interested in macroeconomics casually or as a business-person who needs a better grasp of it in his or her job, I’d highly recommend the book.

Published in Blog

  • Lisa

    Thanks for the rec. I’m a big fan of books that can do this–sort of boil down otherwise  abstruse topics into much more intuitive, quasi-philosophical terms.

  • Ben

    Yeah, me too. There’s always a risk of over-reduction of the complexity in an issue, but in most cases, there is plenty of complexity that’s just over-the-top and unnecessary.

  • Buck Farmer

    Unfortunately, the highlighted sentence hides some politically and economically relevant nuances:

    1. In the current pay-as-you-go system, the burden of consumption reduction falls on current active-workers i.e. if we need more savings to pay for elderly consumption, it doesn’t come out of old people spending less when they’re young, but young people spending less when old people are old. I.e. take money from the young and give to the old.

    2. If you switch to a true forced savings scheme, like a national IRA system, then if a large group of old people divested at once, their returns would be very poor. Then the burden of consumption reduction would fall on them both when they were young (due to forced savings) and when they are old (due to poor market timing / investments). (There is likely a secondary effect on the broader economy, thus the old can harm young people via this channel as well, but I’m not sure how big it would be, particularly if it was expected).

    So the question is, do you want your consumption reduction (i.e. savings or taxes) to come from young people today paying for old people today, or young people yesterday paying for themselves?

    If you want to guarantee “solvency” then you either need to raises taxes (or forced savings) or you need to reduce benefits (or delay when they take effect).

    Overall though he is mostly correct that the gross national product is the main constraint on everything we consume…one wrinkle is that pieces of paper can represent claims on another country’s GDP.

  • Ben

    All good points, none of which, I’m sure, are lost on the author

  • Buck Farmer

    Perhaps not lost on the author, but maybe lost of the readers?

    You’re presenting the book as cutting through the nuance to make things clear to the non-expert executive or manager…

    …but like a lot of material presented to management, the author has cut out material that by its absence pushes the reader towards a conclusion that he wouldn’t be inclined to adopt if he had all the facts.

    It’s just persuasion by omission, hidden as instruction.

  • Ben

    LOL, Buck, I think you’re blowing this out of proportion:
    1. The purpose of the chapter this little piece came from was to explain what GDP is and why national income matters more than national wealth — a point you agree with (except for the wrinkle about financial assets as owning another nation’s future income); this is instruction about what GDP is and why it matters. 2. Maybe its in the way I excerpted or bolded, but to be 100% clear, never in the book does he ever really go beyond the most mainstream of policy prescriptions (and even then, he doesn’t really push for them), and even from the passage here, I don’t think he’s making any persuasion/policy prescription whatsoever. In fact (refer to part 3 below), I don’t think the points you’ve made are necessarily contradicted or contra-indicated by anything in this excerpt.3. I don’t have the book in front of me (I’m at a wedding in Wisconsin), but I specifically didn’t excerpt parts of this piece which talked about how this issue is very complex (and he glossed over a lot of it as he was only addressing a small piece of it for the purposes of addressing part 1) and, unless I am not remembering properly, about the  tradeoffs between young and old that you’ve laid out

  • Buck Farmer

    I understand you’ve omitted a lot of what he’s written…but I’m trying to be charitable in assuming your selections are representative.

    Even these three paragraphs are self-contradictory. The first paragraph lays out an argument for why saving today won’t work as a national retirement scheme (due to everyone selling at once). 

    Then in the second paragraph you quote his implied policy prescription is, “if you want the national retirement scheme to be in better straits, then increase savings today.”

    The third paragraph is completely and totally accurate though, which I am glad to see, excepting the wrinkle about claims on foreign production which is neither here nor there.

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