1.2 Up-and-Down Economics

		1.2 Up-and-Down Economics

		The following examples illustrate ways in which up-and-down economics appears in the media:

		According to the latest statistics, housing starts are up, indicating unexpected strength in the economy. Bond prices fell on the news.

		In his eyes the battle is between the rate-lowering effect of the U.S. recession and the high rate of inflation. That sums up the problem now facing the interest rate forecasters.

		News that U.S. job creation in January was more robust than anticipated sent a signal to currency markets to expect a stepped-up right against inflation, unleashing a bout of buying fervor for the U.S. dollar.

		These examples are typical of commentary on business pages in the newspaper because they are relevant to money-making activity on bond or foreign exchange markets, or because they deal with variables such as interest rates that business people or mortgage renewers would be keen to forecast. Despite its practical value, however, most economists find up-and-down economics "stupefyingly boring" (to use Krugman's term) and are upset that most people think that up-and-down economics is what economists do.

		Why do economists disclaim up-and-down economics? A major reason is that it is too simpleminded. The predictions of up-and-down economics result from applying macroeconomic principles in conjunction with simplifying assumptions that are not quite true. This practice allows quick and easy calculation of predictions that may be good first approximations, particularly for those forced to take immediate action. However, the process lacks the intellectual rigor so prized by academic economists. There is no recognition of how economic forces from a variety of sources interact to influence the variable in question, economic "laws" of questionable empirical validity are employed with unjustified confidence, long-run guides to economic behavior are used to predict results in the short run, and nuances of modern macroeconomic theorizing are ignored.

		Despite this condemnation by academic economists, a major goal of this book is to teach readers up-and-down economics. There are several reasons for doing so.

		1. Of most importance, by learning how to interpret news clips such as the preceding, students will genuinely learn, understand, and remember fundamental macroeconomic principles.

		2. Although boring to academic economists, up-and-down economics is useful to those involved or just interested in the business world. For example, knowing that a rise in inflation will increase interest rates and thereby cause bond prices to fall can help one avoid capital losses on bond holdings. Because so many students studying economics these days are business students, such knowledge is of particular value.