Category Archives: Business Cycles

2020 Second Quarter GDP Decline Is Worst in U.S. History—But Not 32.9 Percent

The good news is that the second quarter’s GDP numbers aren’t nearly as scary as the more dramatic headlines are saying. The economy has not shrunk by a third. The bad news is that yes, we really have just experienced the worst crash in U.S. history. And it’s not over yet. This post gives some context, and some ideas for how to aid the recovery for both the virus and the economy.

Several newspapers are reporting a 32.9 percent decline in GDP. This is a projection. It is not what has actually happened. If the economy were to continue shrinking for an entire year at the rate it did last quarter, GDP will have shrunk by 32.9 percent.

While normalcy might be years away, that steep of a decline is unlikely to happen. 9.5 percent and 7 percent are more accurate numbers for what has happened to the economy. Here is why.

GDP numbers are often seasonally adjusted. For example, an outsized amount of spending happens during the holidays, while other parts of the year are slower. So, GDP figures are often compared to what they looked like at the same time the previous year. That is what seasonal adjustment is, a way to compare apples to apples. For example, 2020’s second quarter GDP is 9.5 smaller than 2019’s second quarter. It is the worst decline in U.S. history, and barely begins to explain the pain that people all over the world are experiencing due to COVID-19. But it is not a 32.9 percent decline.

The non-seasonally adjusted number is a 7 percent decline. That is the change from one quarter to the next. That number also provides useful context. Lockdowns began late in the first quarter, so while the economy took a 5 percent dent then, it makes sense that the second quarter would be even worse, since the full three months were under lockdown. But since the dip had already started, it makes sense that the quarter-to-quarter number is a couple of percentage points gentler than the seasonally adjusted number.

For a fuller explanation, I refer readers to an excellent article by University of Central Arkansas economist (and my former grad school classmate) Jeremy Horpedahl, who has a gift for understanding and explaining statistics.

It will be another three months before we know for sure, but there is a chance the worst of the economic shock has already happened. People are finding ways to adapt. Today’s hardships will be with us for a while longer, and we need to help each other out. If you can, please do. But our troubles are 9.5 percent bad or 7 percent bad, not 32.9 percent bad.

What should we do to fight the virus and help the economy? Two things come to mind.

The first has nothing to do with public policy. It is simply to be prudent. COVID-19 is on pace to be America’s third-leading cause of death this year. Almost everyone who reads this has someone they care about who is high-risk, whether due to age, occupation, or a health condition. Think of them. Do right by them. The more people do to keep the virus under control, the more it will be under control. Some form of masks and social distancing might be necessary until a vaccine or other proven treatment is widely available. That could take a year or more. But it will happen, and the virus will lose. Until then, people need to be prudent. Not living in a hermetic seal, but prudent.

The second thing has everything to do with public policy. It is regulatory reform. CEI’s #NeverNeeded campaign has spent the last several months crafting as many COVID-related policy reforms as we can and explaining them to policy makers, media, coalition members, and the public.

Regulations against telemedicine should never have been on the books in the first place. A more realistic approval process would get new and proven COVID treatments to the public as quickly as possible. Factories wanting to retool to make personal protective equipment for health care workers should not have to wait 45 to 90 days for permits to come through. If a restaurant wants to deliver food to willing customers, regulations should never have forbidden it. The Centers for Disease Control and Preventions should focus on controlling diseases instead of spending $125 million on an anti-vaping campaign.

Nearly a third of occupations now require some kind of government license. In many states, this includes fields such as barbers and decorators. During normal times, these regulations protect incumbents by keeping competitors out. During times of double-digit unemployment, keeping people out of work on purpose is immoral.

President Trump has roughly doubled tariffs. They now cost the average household more than $2,000 per year. For families where someone just lost a job, that tariff money could help to keep them afloat instead.

Just this week, Congress held a hearing regarding potential antitrust cases against large tech companies. These are the companies that are making contactless deliveries and grocery shopping possible. They keep people informed and in touch with friends and family. They are improving video conferencing and other technologies that make remote work and education possible. And they provide on-demand entertainment to help keep people’s spirits up during a difficult time.

To this point, Congress and the president have mostly dealt with the virus and the economic crash with hasty “flash policy” such as stimulus bills. The next one is being drafted right now. Policy makers at all levels of government have already removed more than 800 #NeverNeeded regulations. President Trump issued an order directing agencies to remove more unneeded rules. But the Code of Federal Regulations alone contains 1.1 million regulatory restrictions and 185,000 pages. There is much more to do. For lots of ideas, see

Keynes – The General Theory of Employment, Interest, and Money

Keynes – The General Theory of Employment, Interest, and Money

My undergrad macroeconomics teacher was an avowed Keynesian. Most of what he taught was in this book, except in the forms of Marshallian geometric analysis and Samuelsonian algebra. I could have saved 19-year old me a great deal of time and anguish by simply reading Keynes’ original, mostly verbal explanations of his ideas. In fact, that pedagogical experience was one reason I switched my undergrad major from economics to history, despite my much greater enthusiasm for economics. Depending on who teaches intro classes, economic ideas are sometimes taught more clearly outside of economics departments.

People often forget that Keynes worked from the same quantity theory of money framework his rivals Friedman and Hayek relied on—an insight I was never taught in undergrad, thanks in part to poor standard pedagogical practices.

Nearly all economists, regardless of ideology, agree that tinkering with the money supply can induce temporary booms and busts. Where they differ is that for monetarists and other free-market types, the fact that policymakers can mess with the price system does not imply that they should. There are tradeoffs a boom now comes at the price of a bust later. Picking up one part of the economy comes at the cost of dragging down other parts. Moreover, unintended consequences can be unpredictable, and harder to manage than the original problems.

Keynes and many of the economists he has influenced instead work with idealized models of economics and government. Economists, using increasingly sophisticated techniques, are increasingly able to foresee and adapt to changing circumstances and unintended consequences to maintain economic stability. Fiscal and monetary policies will never be perfect, but with careful management they can outperform unmanaged markets. Also in this model, politicians actually listen to economists. Even more fantastically, politicians use their boom-and-bust power in the public interest. They do not use it to influence their electoral prospects, or give favors to rent-seekers.

On the positive side, Keynes’ remarks about animal spirits remain insightful, though underappreciated. Here Keynes shared important common ground with economists from Adam Smith on down to his rough contemporaries such as Philip Wicksteed, Frank Knight, and F.A. Hayek, who all emphasized human psychology in their works over formal modeling.

Keynes’ followers pursued a different path after Paul Samuelson, preferring instead to confine themselves to quantifiable models, and to study Homo economicus rather than Homo sapiens. The old joke about Keynesians being more Keynesian than Keynes ever was is often true. Fortunately, the behavioral economics movement has done much to revive animal spirits in the wake of MIT-Harvard-Princeton’s sterilizing the profession, though many of them forget that human frailties also apply to policymakers and the policies they make.

This is not Keynes’ fault. But his unintentional legacy has harmed economics as a discipline, which has missed out on important insights and discoveries by largely walling itself off from other, less quantitative disciplines for several decades. Keynesian models have also acted as enablers for policymakers eager to hear justifications for things they want to do anyway, and for excuses to forget that can does not always imply ought.

October Brought 250,000 New Jobs, Despite Bad Trade Restrictions

This press statement is cross-posted from See the original here.

The American economy added 250,000 jobs in October, the U.S. Labor Department announced today. The unemployment rate was meanwhile unchanged from last month, at 3.7 percent – a 50-year low. That’s good news for the economy – it shows that even President Trump’s costly trade tariffs aren’t eclipsing growth, says Ryan Young, CEI fellow:

“Politicians don’t actually run the economy, and hence don’t have that much influence over employment rates or the business cycle. The fundamentals of the U.S. economy are strong, and it is showing in the 250,000 new jobs created in October. In a further show of strength, even with President Trump’s trade policies slowing economic growth by as much as 1.8 percentage points, the economy still grew by 3.5 percent last quarter.  The President’s supporters and critics alike should be delighted at today’s jobs report, and should work together on a range of beneficial policies, from lowering trade barriers to stronger central bank independence to reining in executive branch regulatory excesses.”

Young co-authored a recent report making the case for free trade, Traders of the Lost Ark

Rediscovering a Moral and Economic Case for Free Trade.


Questions for Janet Yellen

janet yellen
The Federal Reserve is arguably the government’s most important agency, even if it is (nominally) independent. It has control over the price system, the most fundamental part of any economy. It also exercises significant power over the banking sector, and in recent years has taken to doing large favors for Wall Street. These are all reasons why Janet Yellen’s nomination for Fed Chair needs to be carefully vetted. To that end, my CEI colleagues John Berlau and Iain Murray and I put together some questions about several facets of the Fed’s mission we would like to Yellen answer, whether during her confirmation hearing or elsewhere. You can read the short WebMemo here. Here is one of our questions about inflation:

Many observers expect you to pursue an inflationary stimulus, and believe this is likely a reason for your nomination. If your actions are already expected, will markets not take these expected price level changes into account in advance? If so, do you believe this would blunt the employment impact of any monetary expansion? Would you respond to these pre-existing expectations with an unexpectedly high inflationary policy?

As John, Iain, and I write, Yellen’s credentials are not in question. But the policies she might pursue as Fed Chair are. Read more here.

CEI Podcast for May 3, 2012: Paving the Way for Innovation and Job Creation

Have a listen here.

Unemployment remains stubbornly high, more than three years after the financial crisis hit. Congress has tried a number of measures, from fiscal stimulus to stricter financial regulations. None of them have worked. That’s because they get in the way of the key driver of economic growth – innovation. And as any entrepreneur will tell you, innovation requires investment. John Berlau, CEI’s Senior Fellow for Finance and Access to Capital, suggests a number of reforms to make innovation, investment, and job creation easier.

Economic Optimism

Mark Mills and Julio Ottino argue that despite current troubles, our economic future is a bright one:

In January 1912, the United States emerged from a two-year recession. Nineteen more followed—along with a century of phenomenal economic growth. Americans in real terms are 700% wealthier today.

In hindsight it seems obvious that emerging technologies circa 1912—electrification, telephony, the dawn of the automobile age, the invention of stainless steel and the radio amplifier—would foster such growth. Yet even knowledgeable contemporary observers failed to grasp their transformational power.

In January 2012, we sit again on the cusp of three grand technological transformations with the potential to rival that of the past century. All find their epicenters in America: big data, smart manufacturing and the wireless revolution.

Read the whole thing.

What Decline and Fall?

Roger Cohen’s column in today’s New York Times is titled “Decline and Fall.” Channeling Gibbon, he compares America in 2011 to Rome in 475 A.D., says “the West is shot,” commits the broken window fallacy, and generally paints a picture of doom and gloom.

Classical references aside, Cohen seems to be innocent of historical knowledge. The graph below shows real GDP since 1929 (source). The wee little dip at the end is the cause of Cohen’s histrionics.

Yes, economic growth is weak. Far, far too many people are out of work. And it will probably be a few years before boom times return. But context, please.

Yes, Regulation Does Keep Unemployment High

Over at RealClearMarkets, my colleague Wayne Crews and I argue that the law of demand holds. Hard to believe that’s actually controversial, but that’s Washington for you. Here’s our conclusion:

Eberly was put in an uncomfortable position when she came to Washington. Just as a lawyer’s job is to vigorously defend clients even if she knows they are guilty, Eberly’s job is to vigorously defend policies that are obviously harmful to the economy. Try as she might, she cannot argue against the law of demand.

Regulations make hiring costlier and thus make jobs scarcer. And regulatory uncertainty makes companies reluctant to hire employees they might not be able to afford down the road. Case closed.

Read the whole thing.

Herbert Hoover, Father of the New Deal

Whether you love the New Deal or loathe it, its policies were not entirely new. FDR’s predecessor, Herbert Hoover, set the precedent. History remembers him as a laissez faire president; a do-nothing who simply let the Great Depression happen. This requires an odd definition of “laissez faire” and an even stranger understanding of “do-nothing” to actually be true.

A new Cato paper from St. Lawrence University economics professor Steve Horwitz takes a closer look:

In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt’s advisers knew that Hoover had started the New Deal. One of them wrote, “When we all burst into Washington … we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself.”

Read the whole paper here.

Hayek vs. Keynes, Round Two

Russ Roberts and John Papola are at it again. Last year they made a rap video starring F.A. Hayek and John Maynard Keynes. It garnered over 2 million views, many of them in economics classrooms. Today, they release the sequel. Check it out.