Scott Sumner on Real Causes of Business Cycles
Scott Sumner has a first-rate post this morning and one of the most important ones you can read if you want a quick look at why real changes in the economy rarely cause large business cycles. Here are the first three paragraphs:
I’ve been thinking about how to teach monetary economics from the beginning. Perhaps before people start learning, they need to unlearn things they believe, that just ain’t so. We market monetarists believe that monetary shocks (or “disequilibrium” if you prefer) [are] the primary cause of business cycles, indeed almost the only cause of big swings in unemployment.
Most people don’t believe this; indeed it’s not even clear that most economists believe this. Instead the average person thinks recessions are caused by big real shocks, or financial shocks, of one sort or another. Asset bubbles bursting, 9/11, stock market crashes, devastating natural disasters, etc.
It’s surprisingly easy to dispose of these real theories. We know that 9/11 didn’t cause the 2001 recession, because the recovery started just 2 months later. The biggest stock market crash in my life was 1987, which was almost identical to 1929, including the subsequent stock price rebound. The biggest natural disaster to hit a rich country in my lifetime was the 2011 Japanese earthquake/tsunami/nuclear meltdown, which killed tens of thousands of people, devastated a sizable area of Japan, and caused their entire nuclear industry (25% of total electrical output) to shutdown for more than a year (causing brownouts.)
Also, check out his graphs.
In an Executive MBA economics course I teach–the only econ course the students get–I spend most of the time on micro and only about the last 8 hours on macro. For that reason, I focus the macro on what we know: Inflation is always and everywhere a monetary phenomenon, to name one. This blog post by Scott will now be on the macro part of my syllabus.