How do trends and cycles interact?

In a piece I already have linked to, Binyamin Appelbaum makes a point in passing that I think deserves further comment:

The new paper, like others of its genre, basically requires belief in a big coincidence: that a short-term catastrophe happened to coincide with the intensification of long-term trends — that the economy crashed at the moment that it was already beginning a gradual descent.

I view this somewhat differently.  Very often trends accumulate, often without much notice, and then a cyclical event causes that trend to explode into full view.  Such a coincidence of cycle and trend is very often no accident and in fact the two are closely related.

Let’s say, as seems to be the case, that wages stagnated, labor market mobility slowed down, and non-outsourcing productivity was slow during 2000-2007 (or maybe longer).  Those are all long-term economic trends and they are all bad news.

During 2000-2007 most Americans acted as if were are on a good trend line when in fact they were on a less favorable trend line.  This influenced spending decisions, borrowing decisions, real estate decisions, and so on.  People overextended themselves and they also created unsustainable bubbles.  Sooner or later the debt cannot be rolled over, the bubbles pop, the crash ensues, AD falls, and so on.  This often takes the form of a discrete cyclical event, as indeed it did in 2008.

One point — still neglected in much of today’s macroeconomic discourse — is that the mis-estimated trend was a major factor behind the cyclical event.  But there is yet more to say about this interrelationship between cycle and trend.

The arrival of the cyclical event, in due time, makes the negative underlying trend more visible.  At first people blame everything on the cycle/crash, but a look at the slow recovery, combined with a study of pre-crash economic problems, shows more has been going on.

The cyclical event itself places greater stress on labor markets, on firm liquidity and thus on R&D, on perceived stocks of wealth, and so on.  As individuals observe the reaction of the economy to this added stress, they start seeing just how wide-ranging and deep the previously existing structural problems have been.

Those observations, and the accompanying economic responses, make the problems worse.  Forecasts become more pessimistic, investment declines, firms will be less keen to commit to workers who are less than the “sure thing,” and so on.  Sometimes this is moving along curves, other times there are shifts in multiple equilibria (“is Greece a European country or a Balkans country?”), toss in some herd behavior too.  In any case these changes are ill-served by the terminology of cyclical vs. structural.  They are cyclical and structural in an intertwined fashion.  And of course this all leads aggregate demand to fall all the more.

I am reminded of the literature in finance that shows how apparently small shifts in information can lead to big movements in market prices.  The initial small shift illuminates the reaction functions of other market traders, which illuminates depth of sentiment, which in turn causes a revision of expectations and thus prices.  For instance the market as a whole may learn from a small shift in orders that core traders were never so optimistic in the first place.

It’s also worth visiting the literature on how sand piles can collapse rather suddenly (“self-organized criticality” is one term used in the economics literature).  That too is a cyclical event yet based on underlying structural problems.

If you hear someone say “if this were structural unemployment, wages would be rising a lot right now,” that is a sign they have not thought through this issue deeply enough.

If you hear someone argue or rebut “so what, did everyone get lazy or stupid in 2009?”, that too is a sign only one dimension of the problem is being considered.

In macroeconomic debate, most one-line zingers are not very good.

Comments

Not sure if it's true in this case, but it makes sense.

I've always been curious about what "trends" mean. In general, what are we to make of trends? In financial markets, one school of thought is your edge is following a trend (The Turtles) while others think the edge is in fading the trend (Victor Neiderhoffer). Many others believe there are no such things as trends in markets except retrospectively.

Leaving financial markets aside, what do trends mean? Some trends are obviously no more than fashion. People latch on to certain clothes to wear or certain music to listen to, perhaps due to relatively random reasons in the beginning, then due to the most socially intelligent jumping on a trend in its early stages in order to signal intelligence, taste and sophistication, while at the end of such a trend the most socially intelligent have moved on to something else as slower movers and thinkers crowd out the trade until it is no longer cool. Then we have a bust. Whether in tulip bulbs or a night-life scene where all the once trendy but now lame bars, clubs and restaurants congregated. This sort of trend is fashion and nothing more, and completely worthless in long-term predictive value.

But then there are long-term trends that last centuries, such as the Industrial Revolution.

The big question for the field of Trend Science is: how do you distinguish a fashion trend from a secular trend? We know you should short the former and buy the latter, so this determination is crucial.

Let's say you are blindfolded and walking across a plane with zero slope. At some point you notice the there's a mild upward slope. It continues for a while. It gets steeper. You've walked a couple miles and it only get steeper. What is your prediction for the slope the earth for the next two miles? Is it a random walk? Is there a field of math or science that would tell you what to predict next? This seems to me to be a key question for Trend Science.

The null hypothesis would be that there are no trends and it is all random. But if that's the case why do economists talk so much about trends as if they had substance to them?

I suppose any trend worth its salt is the result of a feedback loop. So can we identify the feedback loop? If not, I don't think you can call it a trend, just a streak.

+1

That is quite a good one-line zinger.

I've used the sand pile analogy before -- actually connected it to a model where NGDP goes off trend and reverts back (avalanche) in a recession:

http://informationtransfereconomics.blogspot.com/2014/08/can-information-theory-predict.html

The interesting thing is that NGDP is the height of that sand pile and the monetary base is the volume of sand (although the relative dimensions are different so that NGDP ~ MB^2 rather than NGDP ~ MB^1/3).

"If this were structural unemployment, wages would be rising a lot right now." I'm not trying to be contentious, I genuinely want to know: What's wrong with this claim? What other relevant aspects need to be thought through?

Not sure about this one either.

I think the idea (what's wrong with the claim) is that, if it's structural unemployment, that a few percent of the labour force is basically unemployable in a "new" economy, or that in any case their old skills no longer make them employable, and they compete for no-low skilled jobs.

So when the economy exists recession, everyone else can continue to demand higher wages and wages will rise, but unemployment will be higher.

Some argue that it's structural unemployment, but wages are not rising, art least not by much if at all for most people (that's what's wrong with the claim), except in a handful of fairly narrow sectors which does not make the situation easily amenable to an economy-wide analysis.

But perhaps someone else can comment on that. I was wondering too.

I think there is a bias that causes us to view all short term situations as more or less contingent and all long term ones as more or less deterministic. So your thinking here, which I don't disagree with, does happen to cut right along the perforations in these biases, which might give you some pause in concluding it corresponds with reality.

If markets adjust, it would be reasonable to assume they do so long-term even if they fail short term. What would the reverse be like?

Cycles are fractal. The cycle that hit in 2000-2010 (pick you start date) is a once a century event. What everyone though it a trend: rising levels of credit, for example, was a very long cycle so it looked like a trend from inside the cycle. Pull back into centuries and the pattern emerges.

Fukuyama was probably right too, except he missed that the cycle was going to start moving in the opposite direction of the Enlightenment, not stop.

When you say Fukuyama was right, I assume you are talking about the end of history, and not some other aspect of his work.
Is this correct?

Yes. Huntington was more accurate in his assessment, but Fukuyama took the good title and as the traders say, he top ticked a centuries long trend of liberalism. In his latest essay in Foreign Affairs, he sees America decaying.

Fractals make for cool art.

Take a look at the charts over at http://equitablegrowth.org/2014/08/18/evening-comment-male-female-prime-age-employment-rates-since-2000/

Labor market weakness up to 2000 just doesn’t show up in the data. Since 2000, it’s obvious and it doesn’t just start in 2007/8. In my opinion, the U.S. economy started going off the rails with Clinton, but the Tech Bubble masked the decline (the trade deficit soared under Clinton). Under Bush, substantive decline accelerated (the trade deficit hit 6% of GDP), so Bush (and friends) conjured up the housing bubble (construction, MEW, etc.) to partially offset the weakness inherent in his “import everything including replacements for American workers, export only jobs” philosophy.

Of course, it didn’t really work. The housing bubble wasn’t large enough to offset a 6% of GDP trade deficit. The bubble was large enough to crater the economy when it burst.

The source for the employment data is the BLS via FRED via Brad DeLong.

Conjured up the housing bubble?

Yep, it was a focus on "creating wealth" that drove a mass insanity that drive real estate prices higher based on the belief you had to buy RIGHT NOW to get in on "creating wealth" from ever rising real estate prices, and you needed no income or assets to buy real estate because real estate prices HAD TO RISE BY ECONOMIC THEORY of aging housing increasing in value as proved by the higher prices. Entropy does not apply to capital assets. Patents, housing, market monopolies NEVER DEPRECIATE but always increase in price/value.

How do the working poor and unemployed get in on the wealth creation in the economic theory that denies entropy? Buy real estate with no income or assets based on the increasing value paying off the debt. Just like tax cuts pay for themselves.

We still do not hear economists acknowledging entropy, and thus emphasizing the constantly depreciating capital asset values.

Only those who pour massive cash into labor to build capital assets that more than offset the depreciation of existing capital assets are really growing in asset value, but it is labor that is creating wealth. Amazon under Bezos is a great example - the value of Amazon comes from Amazon controlling so much of the Internet and the logistic capital assets, and constantly growing those assets. The depreciation of almost new assets is so high that it wipes out all profits and all free cash is used to hire labor to build more capital assets that will quickly lose value and create losses in profits.

In contrast, the original master of mail order sales, Sears, cut investment and contracted its capital assets, ending up with K-Mart as primarily a retail property manager because the two were built when buy and hold of assets was the sign of great business management. Maybe the problem was not one had figured how to outsource land and buildings to China in the 80s when the two began their decline and real estate earnings were the bright side, like banking was the bright side of GM, Ford, and Chrysler which were outsourcing their manufacturing capital assets.

Sears/K-Mart were "creating wealth" through real estate price inflation, and the US auto industry were "creating wealth" by making loans that would have been illegal in the 60s, falling into loan shark terms. The economics were based on conjuring up a real estate bubble.

Tyler,

"Conjured up the housing bubble?"

Take a look at Bush's speech of June 17th, 2002. I quote

"Three-quarters of white America owns their homes. Less than 50 percent of African Americans are part of the homeownership in America. And less than 50 percent of the Hispanics who live here in this country own their home. And that has got to change for the good of the country. It just does. (Applause.)

And so here are some of the ways to address the issue. First, the single greatest barrier to first time homeownership is a high downpayment. It is really hard for many, many, low income families to make the high downpayment. And so that's why I propose and urge Congress to fully fund the American Dream Downpayment Fund. This will use money, taxpayers' money to help a qualified, low income buyer make a downpayment. And that's important.

One of the barriers to homeownership is the inability to make a downpayment. And if one of the goals is to increase homeownership, it makes sense to help people pay that downpayment. We believe that the amount of money in our budget, fully approved by Congress, will help 40,000 families every year realize the dream of owning a home. (Applause.) Part of the success of Park Place is that the city of Atlanta already does this. And we want to make the plan more robust. We want to make it more full all across America. ..."

Bush pushed for no-doc loans, even NINJA loans. Did the Democrats (notably including Barney Frank) aid and abet the same process? Of course, they did. That doesn't make Bush any less guilty.

See also "Bush drive for home ownership fueled housing bubble" in the NYT. Quotes

"But the story of how the United States got here is partly one of Bush's own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Bush paired his belief that Americans do best when they own their own homes with his conviction that markets do best when left alone. Bush pushed hard to expand home ownership, especially among minority groups, an initiative that dovetailed with both his ambition to expand Republican appeal and the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards."

"For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security, a government retirement and disability benefits program. The housing market was a bright spot: Ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence Lindsay, Bush's first chief economic adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Bush meet housing goals.

"No one wanted to stop that bubble," Lindsay said. "It would have conflicted with the president's own policies.""

"So Bush had to, in his words, "use the mighty muscle of the federal government" to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending."

The economy was quite weak under Bush, even before the 2008 crash. Bush was the ultimate “bread and circuses” politician.

Tax cuts for the wealthy, outsourcing and free trade for corporations, food stamps and no income taxes for the poor, wars for neocons, Amnesty for illegals, financial deregulation for Wall Street, housing bubbles for main street, subprime loans for the unqualified, Medicare plan D for the elderly, NCLB for Teddy K. and the education establishment, etc.

Indeed, Bush actually recruited food stamp recipients with advertising campaigns (in Spanish no less). He worked tirelessly to promote NINJA loans (the “ownership society”).

None of this had to actually be paid for… Because “budget deficits don’t matter”… “trade deficits don’t matter”… “consumer debt doesn’t matter”…

Turned out not to be true. The amazing thing is that the economy was a mess (measured by LFP and the EMPR) in spite of all of his closet Keynesianism (public and private). No surprise there. A 6% of GDP trade deficit and Open Borders swamped his stimulus schemes. The bad news is that Bush’s biggest stimulus scheme (the housing bubble) triggered the Great Recession.

The deeper point is that core tenets of Bush’s crazy economics (“free trade”, economic hollowing out, Open Borders, outsourcing, education as a panacea, etc.) are bipartisan so nothing has changed under Obama and Bush was really just a nuttier version of Clinton (and Reagan to some extent).

Bush continued policies started by Clinton in 1996 as part of his National Homeownership Strategy. Before Bush even took office, Fannie and Freddie were bragging about increasing access to home ownership, particularly among Hispanics.

I don't excuse Bush for his part in this tragic policy blunder.

I dont agree that the economy was weak because of Bush. He obviously inherited the recession, and the slow recovery was part and parcel of the policies that created it. You could say he repeated Clinton's blunder.

Ragu Rajan believes these policies were a palliative for slow income growth. I think that gives politicians too much credit for knowledge of economics. The policies were merely popular.

The flattening of American growth has more to do with the relative strengthening of developing markets, and the mutually supporting policies of foreign export promotion and domestic debt fueled consumption. We are also at the top of our growth curve. A lot of new innovation has made us better off without resulting in higher incomes, ie we are richer than we thought.

Thus past spring I bought an LCD TV for $500. It is bigger, flatter, better, stronger, and faster than the $3000 plasma TV I bought in 2004. Great stagnation? I dont think so.

"The policies were merely popular." That was the mechanism, speculated, that allowed the economy/consumer to be suspended over the cliff like Wile E. Coyote. Being suspended felt better than looking down.

I like that analogy. Super genious.

Imprudent lending and borrowing based on unrealistic expectations of price appreciation, free put options for buyers, and liquidity injections from securitizers kept prices aloft beyond the cliff edge.

But don't forget that the Bush administration made it impossible for the States to stop the "imprudent lending" which in the 60s would have been called loan sharking by suing the States stepping in to regulate because the Federal government would not. Remember the Fed chair argued nothing was imprudent in a free market, nothing was fraud in a free market.

First I ever heard that Bush inherited the recession. Care to explain?

Kudoz for your LCD savings. But an Acer mini costs the same as it did three years ago, and affordable computers have basically the same processing speed as they did ten years ago (1.0Ghz or maybe 20-50% better). That's a lot more relevant for productivity than the cost of LCD televisions produced by Malaysian or Korean producers as compared to their Japanese counterparts (who have largely exited the market).

Perhaps philosophy could provide the keys to unlock the next explosion in well-being?

The LCD prices are a function of massive capital investment - buying lots of labor building factories and machines, and economies of scale. After a decade of explosive investment, the rate of investment is now replacement of capital with marginally better productivity, so the cost of capital in the cost of LCD products is a much smaller share than a decade earlier. The wonders of capitalism.

Too bad the capitalism was not done in the US.

Bush inherited the recession hidden by the central planning policies of Clinton that forced nearly every sector of the US economy to buy trillion in labor intensive capital assets to replace old capital assets before they were three decades old and become more efficient. Clinton forced government and businesses to replace perfectly good 20 year old data processing systems with new ones just because 1999 was not going to be followed by 1900, and just because the Clinton central planners had dictated everything go in the Internet (and tricked Newt to endorse central planning).

Bush restored the proper balance. No requirements on anyone to upgrade data processing. No requirements to rush forward on replacing all the old tube TVs with LCDs by the hundred millions, and no requirement to reallocate spectrum from analog TV to digital communication in practice, just lots of talk about killing off broadcast TV by ignoring the tens of millions of households that can only use OTA.

The lack of pressure to invest meant millions of workers could be fired because all they did was build capital assets.

Oh, yeah, the central planners no longer sought to drive up computer speed, so the race to build faster and faster computers slowed to a crawl. Instead chip makers focused on using less and less power. A major part of that investment was outsourced to Asia. The ideas of Americans became Asian innovations - that Acer is Asian innovation built on US invention sold cheap to Asia. It cost a lot of labor to build those chip factories and tune them to combine what was once hundreds of chips into one chip that is "perfect".

OK, so central planning forced pricate businesses to evade the Y2K scare, Clinton forced private businesses to buy capital which was labour-intensive only (as evidence by forcing them to consider deductions for computers?), and Bush stopped forcing consumers to upgrade their TVs.

I'm sorry if I don't understand that as a complete argument for how Clinton first screwed up everything and Bush saved everything after inheriting a recession.

I was expecting something about the tech crash in 1999, but that was fairly normal for a new sector to get a bubble and least competitive (or overleveraged) companies went out of business. But I thought American investors had recovered from that by 2001.

Willitts,

"Bush continued policies started by Clinton in 1996 as part of his National Homeownership Strategy. Before Bush even took office, Fannie and Freddie were bragging about increasing access to home ownership, particularly among Hispanics."

See the book "Reckless Endangerment" for the details of Clinton's housing follies. However, Bush didn't just continue Clinton's policies, he expanded them.

"I dont agree that the economy was weak because of Bush. He obviously inherited the recession, and the slow recovery was part and parcel of the policies that created it. You could say he repeated Clinton’s blunder."

Clinton's trade deficits peaked at around 3% of GDP (shocking at the time). Bush reached 6%. Bush pushed the "import everything, produce nothing, replace all Americans" pedal considerably harder than any prior American president. Bush embraced "hollowing out" as a personal love affair.

A few years ago, Stephen Roach of Morgan Stanley asked one of Bush's Treasury Secretaries (not Henry Paulson) how America would earn its way in the world after our productive sector collapsed. The answer was that we (the U.S.) would act as 'capital allocator to the world'. Of course, this insane dialog attracted zero attention at the time or subsequently. The only good news is that U.S. credibility as a 'capital allocator' is within rounding error of zero.

"Ragu Rajan believes these policies were a palliative for slow income growth. I think that gives politicians too much credit for knowledge of economics."

It doesn't have to be either or. Bush and friends knew that the economy was dragging but housing could be a plus. Given the need to trick cheap labor immigrants into thinking that they could join the America Dream (without paying higher wages of course), a housing bubble was perfect.

Call it serendipity ending in catastrophe.

Bush administration officials were the ones who usurped the power of the States to regulate all mortgages, cutting off efforts of States, especially State attorneys general to stop implicit if not explicit mortgage fraud.

The Fed was required by law to regulate all mortgage lending, thus the Bush administration argued the States could not prosecute lending fraud, and could not regulate mortgage terms, because that was the Fed's job.

The Fed was run by a chair who stated fraud was impossible in a market.

Thus, a mortgage originator telling someone with no income and no assets that the loan that would increase in balance due for three years and then jump to a 10% interest rate and payments to match would be readily refinanced before the three years were up because the real estate prices would increase so much the loan would only be 90% of value and a cheap fixed rate mortgage would be a slam dunk was NOT FRAUD because it was a free market transaction. Later, the claim is that the high school drop out borrower defrauded the college grad mortgage originator lawyer.

I remember when getting a mortgage required you have at least 20% in assets and an income three times the cost of taxes and mortgage service to get a mortgage, unless you were a special person like a veteran with honor who the government would vouch for so you could get by with only 10% down, but you still needed three times the income.

What was going on in the 90s seemed insane to me, a child of the 60s trying to pay off my mortgage asap and kicking myself for buying such a costly house, while my coworkers were telling me to buy a bigger house with lots of debt so I could "create wealth".

In the 00s, the 90s insanity became sane in comparison.

Especially because I bought my current house in 1986 for about $200K and two years later the crash in NH had dropped the assessed price to $133K. Those who paid 20% down in the early Reagan years were by and large underwater on their mortgages by the end of his term. (I put down 35% and wish I had taken a huge tax hit selling stock and paid 65-75% cash and paid off the mortgage by 1990.)

I kept telling people housing prices would crash, but no one believed me.

I think the argument is that state regulators would have done better than national regulators at preventing NINJA loans and the eventual collapse. I think .... maybe I buy it, but I think a shared regulatory role can provide useful backstops.

"I view this somewhat differently. Very often trends accumulate, often without much notice, and then a cyclical event causes that trend to explode into full view. Such a coincidence of cycle and trend is very often no accident and in fact the two are closely related"

The economy of Europe in the 1920s and the impact of the Great Depression on Europe fit this model rather well. Indeed, the same could be said of the European periphery after 2007 and the crash in 2008.

I think you are correct here.

Some other trends that remained hidden until a catastrophe:

1. Extinction of the dinosaurs revealed by the Yucatan impact
2. Growth of Islamic fundamentalist terrorism overshadowed by WWII and the Cold War
3. Unsustainable government ag subsidies leading to the Dust Bowl and eclipsed by the Great Depression
4. Fall of the Aztec Empire and the arrival of Conquistadores

+1

@Willitts - good examples, but all your examples deal with exogenous events, not endogenous, except for maybe #3. It's like saying: "things remain constant in a system until something outside the system upset the system".

I think another view of cycles and trends is that cycles can be random but trends reflect some underlying reality: look at any Brownian motion study and how, short term, it looks like the stock market (cycle), but long term it does not since the stock market grows upwards while Brownian motion is a straight line.

Department of pithy one-liners:

"In the short run, the market is a voting machine. But in the long run, it's a weighing machine." - Benjamin Graham

Sooner or later the debt cannot be rolled over, the bubbles pop, the crash ensues, AD falls, and so on.

Who said the "popping of a bubble" (what the hell is a bubble anyway, other than "something I don't like") MUST result in "AD falling" ?

This is precisely why we need better monetary policy, so whatever stupid people mean by "bubbles popping" doesn't restult in "AD falling".

Yes, there were supply-side issues at work. So what ? There will always be supply-side issues.

How does that excuse total incompetence on the demand side ?

What happens to your spending plans when the value of your house declines by $200,000?

Do you spend more money, less money, or the same amount of money?

When your stock portfolio decreases in value by $500,000, do you spend more or less on landscaping? Take shorter or longer holidays?

Popped bubbles hit AD. Unless there is an external stimulus (perhaps the Chinese middle class starts buying lots of iPhones, American accounting services and online educational services?), AD will fall, relatively speaking.

You're a moron. Please edumacate yourself.

Every time you call someone a moron here you make that person look smarter and yourself look dumber.

Following article might be of interest:

http://www.cerge-ei.cz/pdf/wp/Wp507.pdf

"Is Greece European or Balkan?" = "Is San Francisco American or Californian?" = "Is Egypt African or Saharan?"

It is plausible that a "mistaken trend" -- too much consumption and too little savings -- exacerbated the recession. That just makes reductions in public investment and the constraint on monetary policy coming from inflation hawks all the nuttier as a response to the recession.

Normally I would agree with you, except this time is different.

First, the nation didnt enter the recession with a surplus from the boom. It entered in tremendous debt that includes not just our national debt but also all of the promised entitlements.

Second, the cycles of discretionary monetary policy and bailouts had to stop. Hair of the dog is not a remedy.

Third, the politicians and rent seekers who created the crisis needed to be destroyed. Uplifting policy has provided them cover. Note that several of the "remedial" plans are called "affordable."

Fourth, the prospect of stagflation still exists.

When Volcker plunged this nation into recession with tight money, he did so with good reason despite an enormous amount of pain. Im sure people predicted depression back then too.

cycles of discretionary monetary policy

God you're stupid.

Volcker plunged this nation into recession with tight money, he did so with good reason

A recession was necessary to break inflation expectations, true.

But why exactly was a recession necessary in 2008, imbecile ?

Planning for balanced budgets in boom times seems like a recipe for disaster.

Planning for major deficits in boom times, financed by tax cuts for the wealthy, the height of stupidity.

No wonder there were $1,000,000,000,000+ deficits once GWB jr left office.

I agree about seemingly cyclical events triggering structural changes.

In 1998, I was chairman of a printing company in eastern Hungary. With the Asian Financial Crisis (LTCM blowup), our indirect sales to Russia, 1/3 of total revenues, collapsed. They recovered in time. But interestingly, profit margins did not. These were 15% of sales (oh the Americans envied us!) before the Crisis, and 7% afterwards. The old world was not recovered.

However, if I take the view that these cyclical events are potentially the culmination of longer trends, then the economics profession should be better at forecasting. And therefore, in 2007, economics should have been warning of "secular stagnation". There were a few voices worrying about the Japanification of the US and Europe, which proved correct in many respects. But as a whole, the economics profession was oblivious.

I find it tiring that economists will run to where the ball was hit in the field and say, "Yes, of course, in hindsight, we predicted it would land here." If you can look at the batter, and can tell where the ball will land, then you have something. If you have to wait until the ball lands to make a prediction, you have nothing.

Random thought. What if structural changes are often the trigger for the cycles?

"In macroeconomic debate, most one-line zingers are not very good."

That's funny, because as I read this, a pithy zinger that pretty much sums up what you are trying to say popped into my head:

"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett

And here's a Keynesian rebuttal:

"We have figured out how to keep the tide in! In order to achieve this happy outcome, however, people need to give up their silly attachment to swim suits. It is only by clinging to your swim suits that you cause the tide to go out. We call this the 'paradox of swim suits'."

Good one.

Swim suits are inefficient.

Many of the 99% might benefit from a swimsuit Santa Claus in those times, perhaps in part afforded by the 1 percenters who swam naked. They'll get swimsuits too, but may have to give up the addiction to prime real estate at the exclusive beach front bars and restaurants and instead resign themselves to passing around the 40s with the neighbourhood ascetics after chanting with the Hare Krishnas to earn their dinner (kidding, the Krishnas don't make you chant for dinner).

One of Cowen's best, and most insightful, blog posts. I suppose he and I differ on the causes, but at least we agree on the trend itself. Cowen mentioned in his NYT interview several weeks ago that the rate of return on capital has been falling for more than 30 years. I have mentioned many times that inequality has been rising for the same period. Coincidence? Maybe. I have faulted Krugman for his obsession with aggregate demand, his insistence on cyclical remedies, not because he's necessarily wrong, but because the trend suggests something more is at work. Cowen's insight provides hope, hope that the trend will receive the attention it deserves, hope for developing a consensus as to its cause. No, I don't expect a consensus as to the remedy, not when political power is disproportionately shared, not when the remedy would impose disproportionate costs. But progress comes so seldom that I won't complain when it does.

I struggle to identify a mechanism whereby decreasing capital returns would contribute to inequality. A priori, I would have though otherwise. Perhaps decreasing capital returns cause capital holders to squeeze labour? What else?

But normally I would think of global competition, mor so than capital holders exerting regulatory or market influence to hold down wages, as a cause for wage stagnation, in which case, i return to ... I struggle to identify a mechanism whereby decreasing capital returns would contribute to inequality.

Housing bubble was in big part a bet on diversity. See speeches of Bush, Mozilo and Cisneros.

God, you're a moron.

He might be a moron, but if so he is a moron who reads and listens. If you missed the decade-long appeals from government to spur minority home ownership, especially among Hispanics, you had your head up your ass.

way to miss the point, moron

Daniel, I am not a moron, but sometimes I look on some aspects of my Creation and wonder what I was thinking.

Care to provide highlights or the Cole's notes version? I don't see more than the seed of an idea and am completely ignorant as to the speeches or possibly even strategies you refer to.

"Very often trends accumulate, often without much notice, and then a cyclical event causes that trend to explode into full view. Such a coincidence of cycle and trend is very often no accident and in fact the two are closely related”

JK Galbraith said "Recessions catch what auditors miss."

It's helpful to look at stock prices to improve your thinking about the overall economy since you can get huge sample sizes of stock prices, but you only have one American economy.

For example, it's not uncommon for a company's stock to suddenly drop sharply as the market comes to a different perspective on its prospects. That's what a lot of the obsession with making quarterly numbers is about. I worked for an innovative firm that missed a lot of quarterly numbers. Sometimes the market would just laugh it off; other times it would dawn on investors: "Uh-oh, these guys really aren't ever going to make the huge pile of profits we thought they were ... Sell!" It's easy to denigrate the erratic behavior of the stock market as irrational, but looking back on it, it made sense.

A lot of what happened in 2007-2008 was a reassessment of the wealth accumulation prospects of Hispanics. Because our society encourages saying nice things about minorities and discourages, even punishes saying not nice things about minorities, there is a built in cognitive bias. So when Angelo Mozillo announced in January 2005 that he was going to lend a trillion dollars to minorities and lower income borrowers, it was dangerous to put down in writing that you've been to a lot of Mexican-American neighborhoods and they don't strike you as being likely long term bets. If you were in the lending business and the government found that in your email, they'd likely make you lend more money to Mexicans.

One obvious problem is that we still have this bias in 2014 against stating in writing how much of the housing bubble was a naive bet on the sacred cow of Diversity.

I've been following the economists' studies for over a half decade now and they are clear that Hispanic default rates were huge.

But Diversity remains such a sacred cow that pointing out what happened in the biggest economic event of this century still gets people sputtering mad about how you are a moron and thus this fundamental finding about the history of 21st Century has almost never been articulated in the newspapers.

And it's hard to notice things you aren't allowed to read.

Hey moron - you do know that the FOMC, the ones who run monetary policy, aka the cause of the recession, consists mostly of lilly-white guys, right ?

Don't you ever get tired of being an imbecile ?

It's hard to notice anything else if you are obsessed with skin color. Plenty of white folks got lent way more than they should have in CA, GA, TX, AZ, NV and every other state with a housing bust in 2007-2009...basically all of them.

You may never have the self awareness to realize this, but you know how this mulp guy posts different versions of the same thing over and over in every thread, and almost no one replies? I'd gather most skip his stuff. Because it's so one-note that we all know what he's going to say in every post. Your shtick is pretty much the same. In the rare instances you post something not related to skin color you are often a fascinating read. Broaden your thinking or continue to bore us, you choose.

What you've described is essentially what happens in a rational expectations model when there's an error in expectations. A single anomalous-looking piece of data does not (nor should it) fundamentally change expectations. When anomalous-looking data accumulates and expectations do adjust, you get something of a double whammy- not only do you 'give back' your estimation error, but the change in expectations means you also 'give back' the accumulated errors you would have made had there not been a change in expectations.

The "discrete, cyclical event" is that change in expectations, or at least its immediate effects. It's not some exogenous shock that comes out of nowhere. When expectations change in a rational expectations framework, you realize all future implications of that change all at once in the present.

In financial markets, big swings in price are almost always caused by changes in expectations rather than by the direct impact of any event- if a company misses its earning estimate, the amount of the miss is almost always trivial in the grand scheme of things. What the miss implies (or might imply) about the future of the company is not at all trivial.

Likewise with housing- for normal consumers, the decision to purchase a home is far and away the most dependent on future expectations of any they make- not only about whether or not you can afford it personally, but also implicitly about its locational value, which ultimately is based on local and regional prosperity & wages. If there's any one place you'd expect to realize a change in expectations about future wage growth, it would be housing.

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