This seems to be the time of the year for me to write long pieces that are going out to my smallest reader base.
I'm going to go out on a limb and say that American business cycles are over.
This is a bold statement for me because I was among the very few economists in America trained in business cycle theory. I began graduate school as a devoted follower of Wesley Mitchell the father of business cycle theory and the father of the most prestigious economic institution, the NBER.
By the time I left graduate school in 1963 I knew there was no theory of business cycles. What Mitchell had settled on was a methodology to describe business cycles. Mitchell's followers made an effort to identify some of the patterns of economic movement associated with these cycles. One, Solomon Fabricant, found a few elements of inventory behavior that might have been connected to business cycle theory but the correlation was too weak to be taken seriously.
Suffice it to say that I know the dates of every business cycle in American and world history. Since I went to grad-school there has never been a year in America where the GDP was lower than in the previous year. There have been seven years where the growth rate of the GDP was significantly lower than the previous year. We call that a recession. I call it a statistically random variation.
Now my bold statement: there are
no more business cycles. By business cycle I mean a year or more when
the GDP is lower than it was in the previous year. If such cycles
return it will be decades off.
My reasoning is simple: as I've pointed out in a previous blog, 60% of our GDP is air, no materials are involved. Air is in unlimited supply. Most importantly, commerce is a positive sum game. Combine air and positive sum and there is no reason for the air to deflate unless it is intentional or caused by a comet.
We can keep growing as fast as we want. China has kept our costs low and declining, so has technology. Even with wildly fluctuating resource prices we see no output variation. Resources are insignificant in the air economy.
There is no reason, other than outrageous exogenous factors, for us to have business cycles.