Chapter 9 The Business Cycle

I. The Business Cycles
II. Unemployment    
III. Inflation

IV. Additional Readings
V Timeline Collection
VI. The Great Recession

2015 Political Economy Controversies 
examine poverty, middle class stagnation, politics and capitalism.

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The Financial Crisis
    The Great Recession

 Democratic Capitalism vs. Capitalistic Democracy 

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I. The 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 Futility of GDP? argues that his
        is not a good definition.-The Becker-Posner Blog 12/17/09
   B. Why business economic activity fluctuated following 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. 
           1. Economic activity eventually increases but by then other areas and sectors
               are in recession. 
           2. 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 balance the budget, lower unemployment,
           or lower inflation.
       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,
Call this a Recession, At Least It is Not the Dark Ages
By Bryan Ward-Perkins 12/22/09
Generations and The Fourth Turning is one of many cycle theories.
    C. Current Conditions
Current Business-Cycle Conditions  
American Institute for Economic Research (AIER)
Why The Great Recession yields a slow recovery
     3. Chance of a Double Dip Video from Business News Network 6/16/10
The Big 4 Economic Indicators Since the Bottom 10/30/13
The Story of the American Recovery in 15 charts  5/8/14 The Washington Post
    D. History
The Great Recession
          2.  A Brief History of U S Banking Problems will provide examples of what has
               caused the business cycle in the United States.
          3.  The Panic of 1825 and the Most Fantastic Financial Swindle-of-All-Time
          4. S&P earnings cycles
Bubbles, Crashes, And Market Corrections, Part 1: 1871 - 1900,  Source
              b. part-2-1900- 1925
5. Hemline Index and Economic Predictions
          6. List of U.S. Recessions
          7. More History

Economy Stalled as First Quarter GDP Only 0.2% Submitted by  

First quarter 2015 real GDP is a measly, pathetic 0.2%.  That's quite disappointing, and just shavings and crumbs away from contraction.  Consumer spending was less than half of the contribution Q4 brought and exports imploded.  While some think this is a report to ignore, that economic growth will spring back, we think this is quite a foreboding of bad news.

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.

Tthe below table shows the GDP component comparison in percentage point spread from Q4 to Q1.  Lest we forget, trade data is always delayed and we believe imports will be revised much higher, potentially causing a Q1 GDP contraction.

     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 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  

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
Perspective on Business Cycles and Monetary Policy
Great Depression by Robert J. Samuelson, the Concise Encyclopedia of Economics
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
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.
Did France Cause the Great Depression?
            d. What Caused the Recession of 1937-38?

        5. Recession of 2007
Slide Show: A Business Cycle Ends, and Many U.S. Workers Lose Ground
                  reviews the latest business expansion ending in early 2008. Business Week
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
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. 
Five ways deflation has already takenhold is a concise forty year review of recent
            cycles From renown economist
Gary Shilling from 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
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
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












H. Long-Term Secular Trends 
The Present Crisis, A Pattern a few pages on the history of capitalism
     2. Kondratiev wave  
takes a long term view of economic cycles
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. Unemployment 
    A. 3 Types of Unemployment
          1. Frictional is caused by time lags in the operation of labor markets.
              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
             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           
Okun's Law and the Great Recession 3/28/12
             e. Okun's Law, Labor Markets in the Global Financial Crisis 12/27/13
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
han the government. 04/01/11
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
                 optimism, and September 11.  
     C. Readings

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





From Economist Magazine 12/14/13 Source

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


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



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
         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

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

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





         F.  Some question government procedures when calculating inflation and economic growth.
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.
 A Note on the Impact of Hedonics and Computers on Real GDP.
     3. Financial Sense Online - The Core Rate
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
            6. Median Real Median Income 
                 a. CPI Adjusted Index  is Red on the graph. 
                     1) Adjustments is for seasonable differences.
                     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 inflation. 
                     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 corresponding methodological change
                          in the CPI-U.
PCE A Index  is Green is a "superlative" index in that it reflects
                     consumer substitution"
is difficult to implement in real time. When
                     oranges are really expensive substitute bananas or grapefruit.
Source is BLS
                  d. 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
                           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.
                           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

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. Source is



See CPI-PCE-Comparison



         G. Other data

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. 

Click to View



from seekingalpha




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

US Treasury yields since 1800, all time low

   H. 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
I. 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

      7. Deflating GDP Example
          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

Real Per Capita GDP





1990 Production 
at 1980 Prices








1990 Q

1980 P
































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

IV. Additional Readings
Presidents and the Business Cycle
Only the Weak Survive import/export imbalances and the business cycle Nouriel Roubini, Project Syndicate (hat tip Mark Thoma) 10/15/10
How the Government Dealt With Past Recessions from the New York Times  
     D. Lessons From the Forgotten Depression 1921: The Crash That Cured Itself

is extensive
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
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
     J. The Paradox of Thrift
      K. What is-the real rate of interest telling us? Financial Times, Mart in Wolf's blog, 3/19/12
      L. Wrong: Nine Economic Policy Disasters and What We Can Learn From Them

 V. Timeline Collection

       A. America's Great Depression Timeline

       B. Timeline of the Great Depression

       C. Long-Term Graphs

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