Chapter 9 The Business Cycle

I. The Business Cycles
II. History of the Business Cycle
III. Unemployment
IV. Inflation
V. Misery Index and Long-Term Secular Trends
VI. Additional Readings

VII. Timeline Collection
VIII. The Great Recession

I. The Business Cycle describes the fluctuations in business activity over time.  
     A. Recession: commonly accepted definition is two consecutive quarters of negative
           growth in Real GDP. The Futility of GDP
argues that this is not a good definition.
     B. Why business economic activity fluctuated follows a cycle


    C. Causes
            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. Endogenous Shock not foreseen by economic models oil embargo
               recessions of the 1970's of 70's.
            3. Rolling Recession 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.
            4. Balance sheet recession: private sector debt causes a focus on paying down debt
                which lowers aggregate demand and substantially lowering economic growth.  
                a. Causes of the Great Recession
                b. An Historical Perspective on the Crisis of 2007-0
            5. Innovation Cycle: railroads, computers, bio-technology  cause growth/crash
            6. Political Events: wars, international trade
            7. Misuse of Monetary and Fiscal Policy: government creates, borrows and or
                spends an incorrect amount of money to moderate economic activity.
            8. 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 Professor Kunter Krumme,
 2) Call this a Recession, At Least It is Not the Dark Ages BW-Perkins
          3) Generations and The Fourth Turning

    D. Current Conditions
Current Business-Cycle Conditions from 
             American Institute for Economic Research (AIER)
2. Why The Great Recession yields a slow recovery
Chance of a Double Dip Video Business News Network 6/10   
           4. The Big 4 Economic Indicators Since the Bottom
           5. The Story of the American Recovery in 15 charts
      E. See Our Studies
      1. The Financial Crisis 
           2. The Great Recession  
           3.  Democratic Capitalism vs. Capitalistic Democracy 
           4. 2015 Political Economy Controversies


It's Official, We're Negative, GDP -0.7% for First Quarter









    F. Leading, coincidental, and lagging indicators are 
            measures like the unemployment rate which respectively
            change before, with or after general economic activity. 
            Economists use to predict future economic activity.

Leading Indicators Links
US Leading Econ Indicators and Related 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
LEI and KRWI - It's Different This Time? P. Kasriel Northern Trust, 4/21/07
Paul L. Kasriel 3 22,07  
2/14 NYT

See Understanding Contrary Indicators  

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II. History of the Business Cycle
      A. General
          1. Most Severe US Recessions
          2. A Brief History of U S Banking will provide examples of what has
              caused the business cycle in the United States.
          3. The Financial Swindle-of-All-Time
          4. S&P earnings cycles
              a. Part 1: 1871 - 1900,  Source
              b. part-2-1900- 1925
          5. Boettke podcast on the Austrian Perspective on
             Business Cycles and Monetary Policy
          6. Hemline Index and Predictions
          7. Cycles Lists
              a. List of U.S. Recessions

              b. Business Cycle data since 1854 from National Bureau of Economic Research
    B. Great Depression  by Robert J. Samuelson, the Concise Encyclopedia of Economics
1. Amity Shales on the Great Depression 
              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. Podcast
              discusses Herbert Hoover, Franklin Delano Roosevelt, the economics of the
          2. 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.      
          3. Did France Cause the Great Depression
          4. What Caused the Recession of 1937-38?
    C. Recession of 2007 Articles
           1. A Business Cycle Ends, U.S. Workers Lose Ground slide show reviews
              the latest business expansion ending in early 2008. 
           2. On the Economy CNBC Video, 4/1008 An overview of the economy with Joseph
               Stiglitz, a Nobel Prize-winning of PIMCO
           3. Fed Watch: Turning Which Corner? 05//09
           4. Older Americans Made Recession Look Better April 2010, by 
              M. Kudlyak, D. Reilly and S. Slivinski, FED Richmond. 
           5. Five ways deflation has already takenhold is a concise forty year review
               of recent cycles From renown economist G Shilling from 
           6. Great Recession Job Losses

           7. Serious Cycles
Top 10 Worldwide 20th Century 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
                  b. Crisis Videos
                      1. American-Experience 29 Crash
                      2. South Sea Bubble of 1720
          3. Great Recession Slow Recovery Episode 1       Episode 2




1 of 10 Scary Charts 4-15-2015


Recovering from Great Recession 

 Video 1 establishes that the recovery actually has been weak, even compared to other
recoveries following deep recessions and financial crises.
Video 2 examines the possible causes of the weakness.
Video 3 concentrates on in my view, is the main cause—government economic policy. Sources Econ 1 Blog and First Principles: 5 Keys to
Restoring  America Prosperity


  III. Unemployment
A. 3 Types of Unemployment
1. Frictional is caused by labor market time lags.
    a. Workers are between employment because they have been fired, are changing
        careers, are seasonal workers, have been temporarily laid off, etc.
    b. Short-term, inevitable, temporary, and is eliminated with time.
2. Structural is caused by changes in consumer demand and technology.
    a. Result is an oversupply of workers with a particular skill. 
    b. This unemployment is often concentrated in a particular area,
        associated with a particular industry, and is often permanent. 
    c. Increased economic activity will not decrease this type of 
       unemployment as training and/or relocation are required.
    d. 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.
3. Cyclical
     a. Caused by a lack of total demand at the end of an economic expansion 
     b. Temporary
     c. 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.
    d. 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

          B. Key Unemployment Topics 
1. Natural unemployment rate (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 social-political unrest. (Greece may run into this 
              problem in late 2012)
  6.  Discouraged workers leaving the workforce lowers unemployment.
                first 2 charts courtesy of Gluskin Shef
        7. Q&A: Unemployment Extension WSJ, 11/18/10
          8. Gallup has Higher Unemployment and Underemployment
              than the government. 04/01/11
          9. How The Government Manipulates Unemployment Statistics  
              D. R. Amerman  3/12
       10. 2 Videos on the negative affects of minimum wage on employment 2/14
       C. Readings
              1. Broad Unemployment Across the U.S. Interactive map from the 
                 July 14, 2009 NYT.
              2. Long Term Unemployment Rate has almost doubled . 9/9/09
              3. Sticky Wages Hold Back Job Growth WSJ, 11/12/10
              4. An-analysis-of-government-statistics-part-2-the-unemployment-rate? 1/3/14
    D. More Unemployment Data

Bad But Getting Better



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



Unemployment Last Two Big Recessions Great Recession 
Was Not So Great



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










NYT 5/28/12

North-Caroling crushes unemployed 12/17/13
Arguing Over Extending Unemployment Benefits  12/14/13

Editors Note: The unemployment rate was high in 2011, 2012 and early 2013. But, calling it a Great Recession compared to the 1970's and early 1980's which also had inflation which really  hurt those on fixed incomes and those with non real estate assets is an exaggeration. Especially since the earlier period had two periods of high  unemployment and ten plus years of slow growth might. wikipedia be a bit of a stretch? 

See 16) Stagflation and the Rise of Supply-Side Economics
IV. Inflation
               A.  Calculating Inflation
             1. 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?
             2. The PPI measures the change in wholesale priced goods..
             3. The PPI is a leading indicator for CPI as wholesalers can usually
                 pass price changes on to retailers  who pass them to consumer.
                 a. Recent increases in foreign competition made passing
                     price increases on more difficult.
                 b. The internet had the same kind of affect in the late 1990's.
             4. Calculating  inflationary rate for a year when a basket of consumer 
                 goods increase from $400 to $420 would be calculated as follows.

            5. Chained Consumer Price Index allows basked of
                goods to change, if oranges are expensive, buy bananas
                a. What if chained cpi had been used to calculate COLA?
                b.  CPI-urban since 1913 check out the 70'
           6.  Some question government procedures when calculating 
                 inflation and  economic growth.
                 a. Shadow Government Statistics  
               b. 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 mat
                     approach read Price Hedonics: A Critical Review and
A Note on the Impact of Hedonics and Computers on Real GDP.
7. From the Internet. Financial Sense Online - The Core Rate
                    a. Monthly Labor Review counters the Shadow Government Statistics
                        arguments concerning inflation calculations          
                    b. An-analysis-of-government-statistics-part-1-introduction-and-the-cpi 
        B. 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
C. 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. Stronger U.S. Dollar-The Winner and Losers
           6. CPI: All Urban Consumer-All Items

          D. Real Median Income
   1. Annalist use 3 different indexes depending
            on their prejudice. Colors are for section e.
            a. CPI Adjusted Index is Red on the graph. 
                1) Adjustments is for seasonable
                2) Using the CPI A in escalation agreements
                    to adjust payments for changes in prices
                    are over-estimating the raise needed to
                    keep-up with inflation. source
b. CPI-U-RS Adjusted is Blue   
                1) Goods used are for urban purchases
                     but does not does not incorporate all
                     possible research results on past
                2) For example, no attempt has been
                    made to reflect any new information
                    on trends in the safety or comfort of 
                    air travel for which there is no corres-
                    ponding methodological change in the
          c. PCE A Index  is Green is a "superlative
              index in that it reflects consumer substi-
              tution" is difficult to implement in real 
              time. When oranges are really expensive
              substitute bananas or grapefruit.
   Source is BLS See CPI-PCE-Comparison
                   d. Result is 3 different time series


















                   e. Results is economists and politicians can use the series 
              to keep their constitutes happy.

Because CPI A is higher, nominal wages are adjusted lowered more. 
Changing buying habits by price helped 15 points with CPI-U-RS and
 29 points with PCE A. While the Federal Reserve considers the PCE A
best for measuring the affects of inflation many use the others bring 
       truth to the statement their are liars, darn liars and statisticians.

          f. Summary
"The CPI measures the change in the out-of-pocket expenditures
                     of all urban households and the PCE index measures the change
                     in goods and services consumed by all households, and nonprofit
                     institutions serving households."  
2) The CPI A is like always shopping at the local convenience stores
                    and the PCE is like shopping at Wal-Mart. Use CPI A to make 
                    people look poor and use PCE to make people look responsible.
                3) Editor's Note: About 20 years ago I read where people
                     concerned over the budget wanted to tie government salaries
                     and SS to a more realistic measure and I was not surprised when
                     government employees making the decision took about ten years
                     to make the change. 

a) SS still uses a  CPI Index to adjust benefits which gives 
                          recipients a bonus. "...many economists, ...conclude that
                          the CPI overstates inflation." "... only some of the upward
                          bias in the CPI have been eliminated." "The Chained C-CPI-U
      is another step toward eliminating the substitution bias remaining
                          in the CPI-U and CPI-W. Source
                     b)  As of 2005 the BLS reports at 5.  "The C-CPI-U to our

                          knowledge currently is not used in any federal legislation
                         as an adjustment mechanism." 

IV. Misery Index and Long-Term Secular Trends
        A. The Misery Index
is the sum of the unemployment the inflation rates. 
             It is a low 8.1% by historical standards with an average of 9.5% since 1948.



from seekingalpha

Inflation Often Determines Interest Rates

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

Note Interest Rates Up 
In 1980's and 1990's

US Treasury yields since 1800, all time low

Real Per Capita GDP
The Best Measure of 
Our Economic System

Editors Note: Current 2014 economic unhappiness with our economy blames capitalism when distribution of income and solving economic related problems in a democratic republic is the job of the people and their government.



B. Macroeconomic disasters since 1870
C. Timeline Collection
1. America's Great Depression
2. Timeline of the Great Depression
3. GB, France, US and Canada
4. Long-Term Graphs 


Discretionary Spending is Down Because Voters
Want Economic Growth to go to SS and Medicare














People Will Always Think 
Prices Are Too High



Stock Prices Continually Up


Reason Is Profits Are Continually Up


Interest Rates Were Constant Until We Decided to Print Money
 and Borrow to Buy Voters Instead of Party Bosses

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
Business Cycles and Financial Crises is extensive
What Inflation Means To You: Inside The Consumer Price Index by Doug Short
  G. Tax by inflation by David John Marotta  3/24/14  of Seeking Alpha
        H. Turning Which Corner? 05/11/09 -Tim Duy's Fed Watch

       I.  The Age of Balance Sheet Recessions: What Post-2008 World Learn from Japan
      J. The Paradox of Thrift
      K. What is-the real rate of interest telling us? Financial Times, Mart in Wolf's blog
L. Wrong: Nine Economic Policy Disasters and What We Can Learn From Them


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Chapter 9 Homework Questions

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chart of the day, jobs chart, september 2012