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Chapter 9 The Business Cycle  


Economists Critique
 America's Educational System
 

Professor A's Advice to College Students  

     Please          

I. Business cycles describe the fluctuations in business activity over time.
   A. Recession: commonly accepted definition is two consecutive quarters
        of negative growth in Real GDP.
The (F)utility of GDP? argues that his
        is not a good definition.-The Becker-Posner Blog 12/17/09
   B. Why business activity fluctuates
       1. Inventory Recession: Excessive optimism causes inventories to over
          expand and eventually they must be worked down causing a recession.
          Computers have made easier to track inventory and made this type of
          recessions less likely. 
       2. Rolling Recessions: Economic downturn is limited to areas or sectors of the
           economy. 
           a. Economic activity eventually increases but by then other areas and sectors
               are in recession. 
           b. International competition has increased the occurrence of this type of 
               recession as sectors such as steel, autos, and recently computers have 
               been affected.
       3. Balance Sheet Recession


       4. Innovation Cycle: railroads, computers, bio-technology
       5. Political Events: wars, international trade
       6. Misuse of Monetary and Fiscal Policy: government creates or borrows an
           incorrect amount of money. Note on the graph the1937 attempt to balance
           the budget!
       7. Non-cyclical Fluctuations
           a. Seasonal variation: Christmas buying rush, spring construction 
           b. Long-Term Secular Trends: the expansion or contraction in the level
               of economic activity over a long period of years (the dark ages, 
               the industrial revolution) For more visit
               
1) Long Waves Theories of Development from the Kunter Krumme, U. of
                 Washington.
               2)
Call this a Recession, At Least It is Not the Dark Ages
                   
By Bryan Ward-Perkins 12/22/09 FT.com
               3)
Generations and The Fourth Turning is one of many cycle theories.
       8. Durable Goods have a long useful life (houses, equipment, etc.) 
           Sale of durable goods contract substantially during a recession as their
           purchase may be easily postponed.  For how other goods are affected visit
           
U.S. Economic Cycles
    C. Current Conditions
         1.
Current Business-Cycle Conditions  
            from
American Institute for Economic Research (AIER)
   
     2. Chance of a Double Dip Video from Business News Network 6/16/10
         3. the big 4 economic indicators since the bottom
10/30/13
         4.
The Story of the American Recovery in 15 charts  5/8/14 The Washington Post
    D. History
          1. 
A Brief History of U S Banking Problems will provide examples of what has
               caused the business cycle in the United States.  
          2. S&P earnings cycles
              a.
Bubbles, Crashes, And Market Corrections, Part 1: 1871 - 1900,  Source
              b. part-2-1900- 1925
              c.
              d.

          3. Hemline Index and Economic Predictions
          4. More History

Q3 GDP Surprisingly Revised Upward by Half a Percentage Point to 3.9% Submitted by on 11

Third quarter 2014 real GDP was revised upward to 3.9% from the original 3.5%.  The reason was investment, as changes in private inventories were revised sharply upward.  Consumer spending was also stronger by over a quarter of a percentage point and also bumped up the revision.  Imports were revised upward and exports downward which subtracted from economic growth.  Overall Q3 GDP was surprisingly strong in this Turkey surprise.

As a reminder, GDP is made up of: Y=C+I+G+{\left(X-M\right)} where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*.  GDP in this overview, unless explicitly stated otherwise, refers to real GDP.  Real GDP is in chained 2009 dollars.

 

Economic data gets revised Here isFinal Revision from The Economist Magazine
E. Leading, coincidental, and lagging indicators are measures such
     as the unemployment rate  which respectively change before, with or
     after general economic activity.  Economists use to predict future
     economic activity.

Interesting Links for Leading Indicators
US Leading Econ Indicators and Realated Composite Indexes for 04/08 
Conference Board U.S. Business Cycle Indicators
Leading Economic Indicators 2007/01/leading-economic
Index of Leading Indicators – Premature to Rule out Recession  
Asha G. Bangalore Northern Trust, May 19, 2008
http://tinyurl.com/4gma4w
LEI and KRWI - It's Different This Time? P. Kasriel Northern Trust, 4/21/07
RECESSION IMMINENT?  LEI AND KRWI ARE FLASHING WARNING
Paul L. Kasriel 3 22,07  
Leading-indicators-a-short-history-of-the-numbers-that-rule-our-world
2/14 NYT

See Understanding Contrary Indicators  
 

ECRI Believes Recession Began in July  11/29/2012

 

     F. More History 
        1. Visit
Business Cycle data since 1854 from the National Bureau of Economic Research.
        3. Boettke podcast on the Austrian
Austrian Perspective on Business Cycles and Monetary Policy
        4.
Great Depression by Robert J. Samuelson, the Concise Encyclopedia of Economics
            
a.
Amity Shales on the Great Depression, On EconTalk, Russ Roberts interviews Amity Shlaes,
               Bloomberg columnist and visiting senior fellow at the Council on Foreign Relations. She talks
               about her new book, The Forgotten Man: A New History of the Great Depression.
               The podcast discusses Herbert Hoover, Franklin Delano Roosevelt, the economics of the
               New Deal and the class warfare of the 1930s
           
b.
The Great Depression, On EconLog and in his column at TCS Daily, Arnold Kling also
                focuses on some of Shlaes's observations adding thoughtful insights.
            c.
Did France Cause the Great Depression?
            d. What Caused the Recession of 1937-38?

        5. Recession of 2007
            a..
Slide Show: A Business Cycle Ends, and Many U.S. Workers Lose Ground
                  reviews the latest business expansion ending in early 2008. Business Week
            b..
On the Economy CNBC Video, April 10., 2008v
                 An overview of the economy with Joseph Stiglitz, a Nobel Prize-winning economist, and
                 Mohamed El-Erian, co-CEO of PIMCO
            c. Fed Watch: Turning Which Corner? 05/11/09 by Tim Duy
            d.
Older Americans Made the Recession Look Better (Excerpts) April 2010,
                 by Marianna Kudlyak, Devin Reilly and Stephen Slivinski
                 of the Federal Reserve Bank of Richmond. 
        6.
Five ways deflation has already takenhold is a concise forty year review of recent
            cycles From renoun economist
Gary Shilling from Bloomberg.com 4/2/13
        7. Economics and the Plague

 

 

Top 10 Financial Crises

10. The Panic of 1907: The fourth so-called ”panic” in 34 years.
9. The Mexican Peso Crisis 1994 aka “The December Mistake” Punta !
8. Argentine economic crisis - 1999 If you have no money, is it a good idea
    to print  more?
7. German hyperinflation - 1918-24 If you have to print a 1,000-billion Mark note, you probably have too much inflation.
6. Souk Al-Manakh - 1982 Try not to use post dated to buy stocks
5. Black Monday - 1987 Can we call a 23% drop in a single day a black swan?
4. Russian financial crisis - 1998 devaluation of the ruble and cancellation of
    debt is never good for a local stock market.
3. East Asian financial crisis - 1997 aka the Asian Contagion
2. Black Tuesday - 1929 — Really? One day, and not the entire Great
    Depression?
1. 1973 Oil Crisis — Big energy increases cause recessions

Top 10 Financial Crises | The Big Picture

Interesting Video
American-Experience Crash of 1929 Series 
South Sea Bubble of 1720    
Slow Recovery-Great Recession episode 1     episode 2 , More on the Unusually Weak Recovery

Recovery from the Great Recession
from Economics One
and
First Principles: 5 keys to restoring America prosperity
One establishes that the recovery actually has been weak—even compared to other recoveries following deep recessions and financial crises.
Two. examines the possible causes of the weakness, and the
Three concentrates on what, in my view, is the main cause—economic policy.

       G. Recent data 

 

 

 

 

 

 

 

 

 

 

 

 

For more read Domestic Income and Recession and
Recession Job Losses: 3 Views 9/9/0

 

 

 

 

 

 

 


 

 

10-scary-charts-october-16-2013-update

 

H. Long-Term Secular Trends 
    
1.
The Present Crisis, A Pattern a few pages on the history of capitalism
     2. Kondratiev wave  
takes a long term view of economic cycles
     3.
Generations and Fourth Turning:an economist and historian com up with a repeating
         80 years cycle that says we are turning into trouble.

The Dow Jones 1905- 2008 also followed a cycle. Oct. 11; 2008 WSJ


 

Tuesday, August 2, 2011  John B. Taylor on Debating History and Policy with Reich and Krugman Editor's Note: Both R and K are noted liberal seen often in the media.  

 

 

Book Summary of American Dynasty
Aristocracy, Fortune, and the Politics of Deceit in the House of Bush
 

 

Will the US, like Japan, have two lost decades

 

 

 

 

 

 

 

 

 

 

Some think prices could drown wages bore President Obama laves office. Picture From Global Economic Intersection

II. Three types of unemployment 
 
    A. Frictional is caused by time lags in the operation of labor markets.
          1. Workers are between employment because they have been fired,
              are changing careers, are seasonal workers, 
              have been temporarily laid off, etc.
          2. Short-term, inevitable, temporary, and is eliminated with time.
     B. Structural is caused by changes in consumer demand and technology.
         1. Result is an oversupply of workers with a particular skill. 
         2. This unemployment is often concentrated in a particular area,
             associated with a particular industry, and is often permanent. 
         3. Increased economic activity will not decrease this type of 
             unemployment as training and/or relocation are required.
         4. Happened in the 1970's and early 1980's as consumers 
             decided to
buy small foreign built cars and other products
             produced in the Rust Belt. Now it is happening because 
             NAFTA and foreign competition  are causing industries to
             restructuring is needed because of  foreign competition.
    
C.
Unemployment's Types & Natural Rate ACDC Economics
          and 
Types of Unemployment Inter Activity
     D. Cyclical
         1. Caused by a lack of total demand at the end of an economic
             expansion 
         2. Temporary
         3. Recession of the early 1990's was due to a drop in demand
             caused by a debt buildup in the 1980's by individuals, businesses,
             and the federal government. Apprehension caused by high 
             structural unemployment of both blue and white collar workers
             slowed the recovery.
         4. Recession of 2001 was caused by debt build up of individuals
             resulting from the long period of prosperity and the stock market
             bubble, excess capital investment caused by Y2K and internet
             optimism, and September 11.  
         5. Great Recession of 2008-09 was caused by the end of an
             excessive building boom compounded by a banking crisis and
             stock market crisis. 

6. Broad Unemployment Across the U.S. Interactive map from the July 14, 2009 NYT.
7.
Unemployment: The Harder You Look, The Uglier It Appears 09/02/09
8.
Long Term Unemployment Rate has almost doubled . 9/9/09
9.
Sticky Wages Hold Back Job Growth WSJ, 11/12/10
10. An-analysis-of-government-statistics-part-2-the-unemployment-rate? 1/3/14

 

From Economist Magazine 12/14/13 Source

Bad but Getting Better

http://www.cbpp.org/cms/index.cfm?fa=view&id=3252

It's Been Worse
Editors Note: The calamity of the1930 resulted in federal programs like food stamps,
Medicaid, Medicare, Social Security and TANF

U3 and U6 Unemployment Rates

http://knightin.typepad.com/.a/6a0147e36af644970b0167622fc2c2970b-popup

 

  E. Other unemployment topics 

       1. Natural unemployment (frictional + structural unemployment)
           is usually 4-6% of the labor force 
      2. Full employment is when cyclical unemployment equals zero 
      3. Okun's Law: a 1% increase in cyclical unemployment (actual rate - 
           natural rate) will cause  a 2.0% annual drop in GNP.
           a. GNP change = (2.0) (unemployment rate change)
           b. If unemployment goes up 2% as it did in the 1990-91 recession
               then the drop in GNP would be 2.0 X 2% or 4%.
           c. Approximate first year (2009) cost of the Great Recession 
               (3.5% X $14,000,000,000,000) /300,000,000 = $1,633/person           
           d.
Okun's Law and the Great Recession 3/28/12
           e. Okun's Law, Labor Markets in the Global Financial Crisis 12/27/13
      4.
Labor Force Participation Rate from The Big Picture blog.
      5. Noneconomic costs of unemployment include loss of skills, self-
           esteem, and 
      6   social-political unrest. (Greece may run into this problem in late 2012)
      7.  Discouraged workers leaving the workforce lowers unemployment.
           first 2 charts courtesy of
Gluskin Shef
      8. Q&A: Unemployment Extension WSJ, 11/18/10
     
9. Gallup has Higher Unemployment and Underemployment
          
than the government. 04/01/11
     10
How The Government Manipulates Unemployment Statistics
            D. R. Amerman  3/12

     11.  2 Videos on the negative affects of minimum wage on employment 2/14

April 2014 Update

May 2014 report pushed employment  back to the 100% of prerecession level.

Graph from calculated risk blog with text and updates by textbooksfree.org

 

The Great Depression was something else and there was no snap, SS, MC, MC...

 

Table 3. Cost of Recessions

(% previous peak annual GDP)

  Recession Recovery Total
1948q4 4.29 2.56 6.84
1953q3 4.07 3.16 7.23
1957q3 3.30 2.60 5.90
1960q2 2.12 1.46 3.58
1969q4 1.07 1.00 2.08
1973q4 4.75 4.48 9.23
1980q1 2.05 2.73* 4.78*
1981q3 8.65 3.07 11.72
1990q3 1.27 2.89 4.15
2001q1 -- -- --
2007q4 5.54 16.57 22.10
The-cost-of-austerity-and-slow-recoveries? from Seeking Alpha

Cost is loss of GDP from prerecession level

 

eBooks.com - Cut book expenses by half

The Last Big Recession    
1980-01       6.3%

1981-01       7.5

1982-01       8.6 Times were already tough!

1982-12-01 10.8 Peak
1983-01      10.4   down 0.4 points
1984-01       8.0    down 2.4 points
1985-01       7.3    down 0.7 points
1986-01       6.7    down 0.6 points
1987-01       6.6    down 0.1 points
The Great Recession
2006-01      4.7%
2007-01      4.6
2008-01      5.0 Times had been good!

2009-11     10.0  Peak
2010-01       9.7     down 0.3 points
2011-01       9.1     down 0.6 points
2012-01       8.3     down 0.8 points
2013-2
         7.9     down 0.4 points
We need 2.1 points to catch the drop during the last big recession.

 

 

 

 

 

 

 

 

 

 

From Global Economic Intersecion

chart of the day, jobs chart, september 2012

From Extended-federal-unemployment-benefits-begin-to-wind-down 5/28/12

Previous page from businessinsider.com/chart-of-the-day-an-even-scarier-jobs-chart-2012-9

Articles North-carolina-shows-how-to-crush-the-unemployed 12/17/13
              Arguing Over Extending Unemployment Benefits  12/14/13


http://en.wikipedia.org/wiki/Unemployment

Editors Note: The unemployment rate
continued high in 2011, 2012
and the early 2013. Calling it a Great
Recession compared to the 1970's
and early 1980's which had inflation
which really  hurt those on fixed incomes
and those with non real estate assets plus
two periods of high unemployment and ten
plus years of slow growth might
be a bit of a stretch? See

16) Stagflation and the Rise of Supply-Side Economics

 

 

III. Inflation
      A. An increase in prices is measured by a price index such as the 
           consumer producer index,  CPI
and the Producer Price
           Index, PPI.
What does a basket of goods cost?
      B. The PPI measures the change in wholesale priced goods..
      C. The PPI is a leading indicator for CPI as wholesalers can
            usually pass price changes on to retailers  who pass them
            to consumer.
           1. Recent increases in foreign competition made passing
                price increases on more difficult.
           2. The internet had the same kind of affect in the late 1990's.
      D. The inflation rate for a year when a basket of consumer goods
            increase from $400 to $420 would be calculated as follows.

        E. Chained Consumer Price Index allows basked of
             goods to change, if oranges are expensive, buy bananas
          
. 1. What if chained cpi had been used to calculate COLA?
           . 2.  CPI-urban since 1913 check out the 70's

  

Because CPI is higher, nominal wages are lowered more. Changing buying habits
by price helped 15 points. The affect of inflation on people who do a lot of shopping
at convenience stores would be interesting!

 

The Misery Index is the sum of the unemployment the inflation rates. A low 8.1% by historical standards with an average of 9.5% since 1948. 

from seekingalpha

Click to View

 

US Treasury yields since 1800, all time low

http://www.businessinsider.com/dylan-grice-next-crisis-treasuries-2012-7

 F. Recent inflation data provided by the Department of Labor and an
    
Interactive graphic at the St. Louis Fed.
 

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 G. Causes of inflation
      1. Demand-pull inflation
          a. Increases in C + I + G + XN will cause GDP to increase.
          b. As the economy nears full employment, the prosperity caused by high employment
               increases demand and put upward pressure on prices.
          c. When this happens, the economy is said to be overheated.
      2. Cost-push inflation
          a. As the economy approaches full employment factor resources become scarce
              allowing their owners to increase prices.
          b. Supply-side shocks can cause high resource prices even if demand for resources
              is low, i.e., OPEC's two oil embargoes of the 1970's
 
H. Economic effect of inflation
      1. Both income and resource allocations are affected by inflation as the market tries
          to adjust to the loss in value caused by inflation.
          a. High gas prices in the 1970's caused a switch to small cars and many people
               bought wood stoves.
          b. Low gas prices in the 1990's made RV's less expensive to run.
      2. Debtors (homeowners, businesses, government) are helped by high inflation because
           they pay back with dollars worth less than those borrowed.
      3. Creditors are hurt by inflation as they are paid back in less valuable dollars. 
          Those on a fixed income are also hurt by the cheaper dollars. 
      4. Cost-of-Living Increases (COLA's) were instituted in the 1970's to negate
          the severe effects of that period's high inflation.
          For more information visit
Cost of living from Wikipedia.
      5. Deflating GDP
          a. Inflation can be taken out of growth in GDP by expressing later year production
              at earlier year prices. 
          b. This graph deflates recent GDP per capita data.
          c. In the following chart, letters Q, P and T are quantity, price per unit and total
              respectively.

      5. http://research.stlouisfed.org/fred2/grInflation Graph aph/?id=CPIAUCSL,

 

Real Per Capita GDP

 

 

1980

1990

1990 Production 
at 1980 Prices

 

 

Production

Q

P

T

Q

P

T

1990 Q

1980 P

T

Shirts

1

10

10

2

20

40

2

10

20

Movies

2

3

6

3

5

15

3

3

9

GDP

 

 

16

 

 

55

 

 

29

Note : Output more than tripled in "nominal" terms but in real terms output increased by 81.25% (29-16)/16

I.  Some question government procedures when calculating inflation and economic growth.
         1. Shadow Government Statistics  
         2. Grossly Distorted Procedures explains how Hedonics is a way of accounting for the changing quality of products when calculating price movements.
              For example, today's computers are 2 to 3 times faster and have more memory than models produced just a few years ago.
              If someone can buy a better computer today than last year for the same price, have not prices really fallen? Here is another example.
              Is it realistic to compare the price of a 1955 Chevy with the price of a 2005 Toyota with air conditioning, DVD player, anti-lock breaks,
              seat belts, air bags, side air bags, power steering, power brakes, etc etc etc?. For a mathematical approach read
Price Hedonics: A Critical Review.
              and
 A Note on the Impact of Hedonics and Computers on Real GDP.
        
3. Financial Sense Online - The Core Rate
        4.
Monthly Labor Review counters the Shadow Government Statistics arguments concerning inflation calculations
        5. An-analysis-of-government-statistics-part-1-introduction-and-the-cpi 12/17/13 Seeking Alpha
IV. Additional Readings
         A.
Presidents and the business Cycle
         B.
Only the Weak Survive import/export imbalances and the business cycle Nouriel Roubini, Project Syndicate (hat tip Mark Thoma) 10/15/10
        
C.
How the Government Dealt With Past Recessions
from the New York Times  
         D. Lessons From the Forgotten Depression 1921: The Crash That Cured Itself
         E.

is extensive
         F.
What Inflation Means To You: Inside The Consumer Price Index by Doug Short of Seeking Alpha 12/12/13
        
G. Tax by inflation by David John Marotta  3/24/14  of Seeking Alpha
       

Interesting Articles

Turning Which Corner? 05/11/09 -Tim Duy's Fed Watch

The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005

The Paradox of Thrift

What is-the real rate of interest telling us. Financial Times, Martin Wolf's blog, 3/19/12

Two Important Timelines and Two Interesting Graphs

America's Great Depression Timeline

Timeline of the Great Depression

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From From Inflationdata.com

 

 

 

 
Updated through March of 2014

september-2014-cpi-annual-inflation-rate-unchanged
explores COLA and much bore.

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