Chapter 9 The Business Cycle
The Business Cycles
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
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 FT.com
3) Generations and The Fourth Turning
D. Current Conditions
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.
II. History of the
1. A Brief History of U S Banking will provide examples of what has
caused the business cycle in the United States.
2. The Financial Swindle-of-All-Time
3. S&P earnings cycles
a. Part 1: 1871 - 1900, Source
b. part-2-1900- 1925
4.Boettke podcast on the Austrian Perspective on
Business Cycles and Monetary Policy
5. Hemline Index and Predictions
6. Cycles Lists
a. List of U.S. Recessions
b. Business Cycle data since 1854 from National Bureau of Economic Research
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 Bloomberg.com
6. Great Recession Job Losses
D. Serious Cycles
Top 10 Financial Crises
Recovering from Great Recession
1 establishes that the recovery actually has been weak, even
compared to other
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
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.
a. Caused by a lack of total demand at the end of an economic expansion
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
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
Unemployment Last Two Big Recessions
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
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.
Chained Consumer Price Index allows basked of
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
Results is economists and politicians can use the series
Because CPI A is higher, nominal wages are adjusted
Misery Index and Long-Term Secular Trends
Inflation Often Determines Interest Rates
Note Interest Rates
Real Per Capita GDP
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.
Discretionary Spending is Down Because
People Will Always Think
Stock Prices Continually Up
Reason Is Profits Are Continually Up
Interest Rates Were Constant Until We
Decided to Print Money
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. Business Cycles and Financial Crises is extensive
F. 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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