Sunday, January 4, 2009

Why the Chair of of the NBER Business Cycle Dating Committee Should Be Reading EPJ

He would be less "surprised".

In recent weeks, I have been pounding away at the fact that according to ABCT, a recession is a period when the consumption-savings ratio readjusts in favor of consumption.

On December 26, for example, I wrote:

The demand for cash is obviously very strong--people are very scared about the economy. However, this doesn't mean that the consumption-savings ratio is not readjusting towards consumption. If capital goods sales plummet faster than retail sales, and they are, the ratio is readjusting in favor of consumption. ABCT lives. What's going on is a downward readjustment of the price level at the same time as the consumption savings ratio is readjusted, with the added demand for cash acting as though the money supply is shrinking.
And, of course, my multitude of comments focusing on consumption have been made here, here, here and here.

So what has appeared at the new blog of Robert E. Hall and Susan Woodward? (Hall is the chair of the NBER business cycle dating committee--the dating U.S. recessions start/stop committee-- as well as being an economist at Stanford and the president of the American Economic Association) Under the headline Consumption Surprise they write (my emphasis):

Commentators have been exclaiming over the decline in consumer spending in recent months. It’s true that spending in dollars is down, but an interesting fact has escaped attention: In November, the volume of consumption rose, despite a decline in spending. The reason is that prices fell. We used to talk about adjusting consumption and other components of GDP for inflation, but now we have to consider adjustments for price declines. The two pictures show durables and non-durables consumption, adjusted for price declines.

Consumption of durable goods, adjusted for price declines.

Consumption of non-durables and services, adjusted for price declines.

No "surprise" about this for EPJ readers, and the decline in prices and the resulting necessary readjustment showing a climb in consumption versus durable goods (i.e. capital goods) hasn't "escaped attention" at EPJ, either.


  1. You write here and in previous posts that durable consumer goods are "capital goods". However in any of the classic (Mises/Hayek/Rothbard) explanations of ABCT that I've come across, there is no emphasis on the types of consumer goods produced, durable or not. Instead "capital goods" seem to refer only to producers' goods.

    However it does seem that this business cycle has been associated with an overproduction of consumer durables (houses etc.) relative to non-durables. Is this therefore a modification of the conventional ABCT?

  2. The short answer is yes, in today's terminology/classification scheme. However, I am certain that M, H and R would have no problem classifying houses, for example, as a capital good.

    That said,there is still work that needs to be done to refine ABCT. Nothing major, just polishing the edges. For example, a hot dog vendor in front of a construction site is in some sense capital good support, versus a hot dog vendor near Central Park.

    During a downturn, the hot dog vendor at a construction site is likely to see a major drop in sales, while the vendor at Central Park is likely to see an upswing.

    Prevailing economics tends to look at the physical properties of a product and then classify it, rather than the role it plays in the structure of production. This is an error.