U.S. business cycles do not follow some smooth form of a sine function even if one annoying rightwing troll insists they do. I was thinking about how to express this in terms of the employment-population (EP) ratio when Divorced one like Bush made this easier for me with:
1948 to 1960 vacillation within a range of 1 point (55 to 56). Then the nation got use to an ever increasing E/P ratio from around 1960 to 2000.
My read of the data goes a little differently. As I see the data from 1948 to 1975, the EP ratio hovered about 56.6 percent and then went on an upward march to its 64 percent in early 1998. Now I have suggested in the past that the natural rate of EP has been around 64 percent from 1998 onwards but I would seriously doubt that the natural rate of EP was 64 percent during either the Carter recession, the Reagan recession, or the Bush41 recession.
Now while this is certainly not a perfect way of capturing the natural rate, let’s postulate that the natural rate was 56.6 percent in December 1975, was 64 percent from January 1997 onwards, and steadily increased from 56.6 percent to 64 percent during the intervening months. We then get our second graph which tries to capture the difference between the natural and actual rates.
Based on this metric, the Bush41 recession and subsequent recovery looks quite different from the 2001 recession and its aftermath. One difference is that the gap between the natural rate of EP (or EP*) was only 1 percent in late 1992 and early 1993, while it reached 2 percent by September 2003. Another difference relates to how fast we returned to the natural rate. During the Clinton recovery, this took only two years. Two years after the gap began coming down during the Bush43 recovery, we’d gotten only half way there. OK, the gap continued to fall for the next year plus but we still had a gap as of the end of 2006.
There is one slight similarity. Midway in Clinton’s first term, the FED decided to raise interest rates so the gap reappeared for a while during 1995. But we returned to full employment in 1996 and 1997 before having what may have been a very strong labor market. The FED also started raising interest rates during Bush43’s second term even before we got back to full employment. So what little progress we saw in getting back to full employment has seen an about face during the first three quarters of this year.
Beyond this slight similarity, it should be clear to most that the most recent business cycle is not at all like what happened during the 1990’s. But then this should be no surprise as not all business cycles are alike – unless you are some rightwing troll who learned all of his economics at the feet of Donald Luskin.