Another take on the “game of musical chairs” view of business cycle

Britmouse did a post that describes Scott Sumner´s “game of musical chairs” view of business cycles. I thought it interesting to see how it compares to the US situation.

The first chart shows US W/NGDP, where W is the average hourly earnings of nonsupervisory production workers. When the crash hit in mid-2008 it spikes. Wages are sticky so unemployment rises (i,e not enough chairs left for all workers to sit).

Musical Chairs_1

Unemployment (both the ‘regular’ and the U6 (considers those marginally attached and ‘involuntary’ part timers) measures) is graphed next.

Musical Chairs_2

Contrary to what´s happened in the UK, in the US the W/NGDP ratio has come back down. That explains the fall in unemployment. But unemployment should have come down much more given the fall in W/NGDP towards levels that prevailed before the crisis.

And that is very likely due to the NGDP gap that has remained wide even if the ‘new’ trend level is somewhat lower than the previous one.

Musical Chairs_3

Details to note: From the last chart we see that between 2003 and early 2006 NGDP is ‘climbing’ back to trend. Therefore, NGDP growth is higher than trend growth, implying that the W/NGDP ratio is falling and so is unemployment.

In 2006-07, NGDP grows close to trend growth. Unemployment ‘stabilizes’ and so does W/NGDP.

Then, the ‘tsunami’ arrived. Some say it was due to the bursting of the house bubble, some say it was the result of the financial crisis that ensued (with Lehman  the trigger), with all these things ‘commingling’ with the high level of private debt that prevailed. MM´s point the finger at the Fed and say “you did it”!

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One thought on “Another take on the “game of musical chairs” view of business cycle

  1. It is so sad to see defeatism and lowered expectations become institutionalized and accepted by media and punditry.

    Yes, suddenly in 2008 the large diverse nation of the USA lost its ability to grow as it had in the past. People lost the will to work, inventors got stupid, the infrastructure clogged.

    Remarkably, the same thing happened to Japan in 1992—going great guns, then one day—poof! Can’t grow like they used to.

    Did I hear a lot of commentary like this in the 1970s—yes, only worse. The USA was finished as a nation back then. Rising crime, inflation, endless wars, the great inventions all invented etc etc etc. The oil embargo.

    People work and get motivated to engage in business when prospects are good. There is a virtuous cycle.

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