Monday, January 21, 2008

On Recessions

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, has a very nice piece up today that identifies and debunks five myths about recessions.  Here's myth number five and his accompanying argument:

5. There is a regular business cycle.

In a pair of articles in the Quarterly Journal of Economics published in 1920 and 1921, Columbia University economist H.L. Moore hypothesized that the primary cause of economic cycles was the regular eight-year cycle of the modes of the planet Venus. This type of thinking, along with 19th-century English economist William Stanley Jevons's theory that the 10-year sunspot cycle causes economic fluctuations, perhaps accounts for the widespread notion that there is a regular business cycle.

Don't count on it. The term "business cycle" is imprecise. Economic fluctuations affect everyone, not just businesses, and they are, unlike astral cycles, anything but regular. In the nine recessions since 1949, the shortest time between two recessions has been three quarters (the recessions of 1980 and 1981-82), while the longest has been just short of 10 years (the recessions of 1991 and 2001). When the next recession ends, a good guess will be that the expansion that follows will be somewhere between one year and 10 years in length.

A better analogy might be to think of our economic future as being a road trip in a 1971 Ford Pinto. Our car might burst into flames in the next instant, there might be a truck in our lane around the bend, or we just might make it all the way to California.

The whole article is short and well worth a read.

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