Projecting the Path of the Next Business Cycle
With the model presented in the previous post, Attractor States in the Business cycle, we could conceivably project the path of the next business cycle. How could we do this? The model shows that productive capacity regularly rose by 18%. The last rise was 17%. So I will assume a 17% rise in attractor productive capacity of the next business cycle.
The projected path of the next business cycle is the top line. In the next business cycle we would have a real GDP of $19 trillion at the current 74% utilization rate of labor and capital.
So let’s assume for a moment that this projection is quite possible… no matter what kind of fiscal or monetary policy we throw at the economy.
Now ask yourself, what kind of economy do you want to see on that path? Do you want to see an economy with high inequality? Do you want to see a cleaner economy? Do you want to see an investment driven economy? Do you want to see an economy devoted to advancing human capital? Do you want to see an economy with less working hours?
The point is this… the economy will want to go to that path. We could already see where we are headed. Now free your mind from only worrying about this business cycle. There will have to be a recession to get to the next path. We eventually welcome a recession. Why? Because it is a natural process that allows the economy to jump from one attractor state to a greater attractor state.
From my understanding, the point at which a recession would need to occur is determined by effective demand. We have some control over that.
So… What do you want the economy to look like when we get there? Do you want low interest rates that try to feed the wealth effect with higher asset prices? Do you want higher labor share so that labor has more political and economic power? Do you want lower or higher taxes on the wealthy?
We need to be more focused on what kind of economy we want… not trying to force feed an economy that we think is dying. The economy is not dying. It is just sluggish because labor share has fallen. In the moment that labor share starts to rise, we will see life return to the economy. We will eventually see a recession, but that is part of the process of expanding the economy to a greater level.
The first order effect is clearly that the economy grows while TFUR varies near the 70 to 80 precent range. Models based on population and productivity say this will happen without business cycles.
You seem to be saying that this first order effect cannot manifest unless we have business cycles.
Or am I confused again?
Hi Arne,
Yes, the economy will grow with population and productivity. So how could the economy grow? Can you imagine an economy that just moves up the attractor path and keeps going and going? Then how does real GDP jump to the higher line upon which it will grow again?
Do we have to have a recession?
Why can’t real GDP just keep going straight up at say 78% TFUR?
Look at the part where the attractor path jumped 26% in the late 90’s. There was no recession. What happened? You had Bernanke claiming the triumph over recessions. There was a productivity explosion that only happened because effective demand rose at the same time. But a recession eventually came. Could the economy safely and sustainably grow like it did in the late 90’s again?
So it is not that the first order effect manifests because of business cycles. The issue is not even the first order effect. The issue is the attractor path. What is it? Why does real GDP follow it? Then how does a recession function to break to a higher path?
Think of the attractor path. The economy organizes itself into a definable growth structure with production, prices, unemployment rate, utilization of capital… What if real GDP started rising above that line of an organized economy? You would have too much productivity, too much production for the price level. Profit rates would fall… unless… labor received more money with which to support the increased productivity.
But how far can labor receive more money? Firms have their limits. In the late 90’s, the good times were rolling. There didn’t seem to be a problem in sharing the good fortune with labor. But that scenario eventually ran its course. A recession hit.
Yet, do you notice how real GDP does not collapse as the utilization of labor and capital on the x-axis collapses? In some cases it even rises. How does that happen? Is that where your confusion is?