I saw a well-publicized comment that the business cycle has been abolished recently. As I will soon publish a book on recessions, this poses a risk to my business plans. I don’t want to review what was said exactly elsewhere (mainly because I haven’t gone through the details of the argument), but I’m just giving my turn on the idea. If we stick enough in the way we express ourselves, this is not such a controversial opinion.
End of recessions!
We could argue something like this:
Under current institutional arrangements and political preferences, developped countries can have indefinitely long periods of national expansion.
The sneaky trick are the three bold phrases.
- “[C]current institutional arrangements and political preferences“: things can change!
- “[[[[VS]a“: it is; it is a probabilistic statement; as long as we are not stupid enough to stick real probabilities to it, we cannot prove the opposite …
- “[[[[national] expansion “: puts aside regional and sectoral recessions.
The “may” part of the declaration is worded so kindly that I see no need to continue it. But I would point out that if we use a probabilistic formulation (“the volatility of real GDP growth will be reduced”), things like recessions – even the financial crisis – could be explained as bad luck. Since the most sensible people will stick such qualifiers into their predictions (the proponents of “Great Moderation” have done so), it’s always something to keep in mind.
I will consider the two remaining points.
Current institutions and political preferences
Since the 1990s, developed countries have followed a similar scenario for structural changes in the economy (modulo the experience of the euro zone, which generated corresponding outliers of economic results in the periphery). The best summary description is “neoliberal reforms”, but this term is losing its meaning in popular discourse. For my purposes here, I am thinking of many parallel developments, particularly in the labor market. (In the book Full job abandoned (Amazon Affiliate Link), Bill Mitchell and Joan Musken refer to the “OECD Jobs Study (1994)” as the common thread running through the labor market.)
The figure above shows the annual growth rate of real GDP in the United States. The vertical red line indicates 1990, which is roughly where we saw the institutional changes taking place. Just looking at this graph shows that the volatility of the growth rate has gone down – especially if you get your hands on the data around the period 2008-2010. Other countries experienced a similar decline.
Using the terminology favored by coherent stock-flow modelers, the economy has moved to new steady state around 1990. The economic variables are still evolving, but they tend to approach certain values.
As has been repeatedly pointed out, the United States has drifted towards a weaker path of economic growth since the financial crisis. I like to think of it as “neoliberal stasis”. This pattern of behavior is often called the “low pressure” economy by post-Keynesians (as opposed to the “high pressure” economy observed in the early post-war decades).
The analogies with the physical sciences must always be taken with a grain of salt, but the terms “economy at low pressure” and “economy at high pressure” are suggestive: physical objects under high pressure tend to explode, those at low pressure , not really .
The first volume of my text on recessions could offer a less fragile explanation, but the analogy offers a fairly good intuition.
Thus, we can come to the simplified version of the argument: if policy makers keep the economy at a low pressure state, recessions should be unlikely. This type of corresponds to the observed data.
The financial crisis can be explained quite simply. The transition to a low-pressure economy led to a sharp drop in interest rates, which led to a localized boom in the housing markets. Regulators dropped the ball on the implications, and the economy “really exploded.”
As long as regulators stay on the ball, total collapse like 2008 could be avoided. A Minsky-ite like me would be skeptical about this, but we will know. For now, market players have learned a lesson, and it’s unclear how long it will take before the senseless risk-seeking behavior seen before 2007 returns.
Localized recessions
The last criterion is the use of national recessions. Recessions on a regional or sectoral basis always occur. (For example, the Canadian province of Alberta has qualified as a recession in recent years, if we use an increase in the unemployment rate as the definition of recession.)
If you are laid off in a regional or sectoral recession, you are just as laid off as in a national recession. The only difference is that our friendly central planners at the central bank are unable to do much to avoid such recessions, and they will accept no blame if they occur. (“It’s a healthy rebalancing!”)
The economic cycle has not been abolished, but rather the economic cycle is fragmented. We just have to ask ourselves what could lead to a new correlation between the different economic cycles. We may be lucky and successfully avoid such a correlation over a long period of time.
Final remarks
Since the early 1990s, national recessions have been avoided in developed countries for a long time, and it is not shocking to think that this could continue.
Publication update
If I put my manuscript of Recessions: Volume I, apart for about a month, in part to allow more comments. Also, I can more easily spot problems with the text if I haven’t reviewed it recently, because the text is fresh. (If you read a text you just wrote, you tend to read what you wanted to write, not actually the words you wrote.)
As for volume II, I think I’ll sneak into my “Intermediate MMT Primer” in between. The sequence of articles on MMT that I just wrote is actually a chapter (on determining the price level). The next most important chapter will be devoted to budgetary constraints. Finally, the last chapter planned would be the one that offers an overview of the MMT literature – what to read next? (I don’t count the initial introductory chapter “What is this book?”)
Once these topics are covered, I don’t know how much to add, I aim to make it a short text that people can read to see if the reviews they see in the news make sense (spoiler : no) . I don’t care about every element of the MMT theory, but I just want to cover the subject of the main debates and why most of the criticisms are straw man attacks. The mysterious things that concern some people (consolidation, external restraint) are things that only a handful of people care about.
The text will be short and priced as such. As an ebook, being short is not a problem. However, too short a text makes reading a paperback difficult. I might be forced to cheat and change the page size to a smaller one so that the text is not too thin. (I’ll worry about it when the time comes.)
The key is that I want this MMT boot text to be done quickly, so I can go back to Recessions: Volume II. The main research task for me is to get my hands on “canonical” MMT articles to build my investigation chapter, because the chapter on financial constraints is written almost by itself.
(c) Brian Romanchuk 2020
