Analyzing Modern Business Cycles: Essays Honoring Geoffrey H. Moore. - book reviews

Business Economics, July, 1991 by William S. Brown

IN SPITE OF our periodic proclivity to claim the end of the business cycle, economists continue to look for ways to understand and forecast cycle turning points. The 1960s and 1970s saw econometricians attempting to construct "scientific" forecasts based upon the Keynesian model, but when these models proved to be less than successful (to put it politely . . . ), theorists sought to develop new approaches. One result was the new classical school, which argued that cycles were primarily the result of asymmetric or imperfect information. This school is still exerting significant influence on the profession, but has not been without its critics.

One group of critics, the real business cycle theorists, contend that cycles result not from monetary or informational disturbances but from real factors - technological shocks, productivity changes, etc. Mark Rush's survey article in the July 1990 issue of Business Economics provides a nontechnical introduction to real business cycle theory and a comparison with the new classical approach. New Keynesian theorists are critical of both the new classical and real business cycle theorists, as the article by Hyman P. Minsky and Mark D. Vaughan in the same issue of Business Economics shows. Economists may be making progress, but we still don't have a well-accepted explanation of the business cycle. Until we get one, practitioners can do little better than base their forecasts on the indicators approach popularized long ago by Geoffrey Moore and his colleagues at the National Bureau of Economic Research.

Analyzing Modern Business Cycles is a collection of essays given in honor of Geoffrey Moore on the occasion of his seventy-fifth birthday. The editor, Philip Klein, must have given the authors a free rein because the papers cover a wide range of subjects and there is little to tie them together other than the very broad subject of business cycle theory. Still, all of the papers are worth reading, and a few offer important insights.

The first paper, "Understanding Business Cycles Today: A Critical Review of Theory and Fact," by Ernest A. Boehm may be the best one in the collection. Boehm notes that there are both endogenous and exogenous causes of cycles and concludes that, while each cycle is distinct, there are also common elements to all business cycles. The implication is that any theory suggesting random elements as the main source of cycles is suspect. Since new classical theory postulates that cycles are caused by random monetary shocks and real business cycle theory places blame on technology shocks, both theories fail by Boehm's criteria. Boehm concludes that an eclectic theory of the cycle is necessary and that continual monitoring is needed for stabilization purposes.

Alfred L. Malabre's paper, "The Long Run Efficacy of Efforts to Mitigate Downturns," is perhaps the most discouraging paper in the volume. Malabre contends that government policies have been successful in reducing the severity of postwar recessions and increasing the length of expansions. However, with this success comes a danger. Recessions, Malabre believes, cleanse the system and eradicate bottlenecks and imbalances. Persistent policy stimulus has reduced the "natural resilieney" of the economy. This does not portend well for the future and may explain why, in spite of a series of tax cuts and investment incentives during the Reagan years, real economic growth averaged less than 3 percent per year, considerably less than the historic norm.

The other papers in this collection deal with more specific issues. John P. Cullity's paper, "Diminished Unit Labor Cost Pressures: Importance for Methuselah Expansion," shows that the fundamental reason for the length of the 1980s expansion is a change in the relationship between hourly compensation and productivity. Philip Klein's paper, "Entrepreneurial Confidence and Money Illusion," is an interesting empirical study concluding that managers do not suffer from money illusion, though their ability to forecast inflation is far from precise. This is significant because it casts doubts on cycle theories based upon price level ignorance. Other papers include an assessment of macroeconomic forecasting by Stephen K. McNees, a somewhat technical discussion on the usefulness of including the leading indicators in macroeconometric models by Victor Zarnowitz and Phillip Braun, an explanation of why there was no wealth effect following the 1987 stock market crash by Phillip Cagan, and the international transmission of real and monetary disturbances by Anna J. Swartz and Michael D. Bordo.

If there was one thing missing to this volume it was commentary by the person being honored, Geoffrey Moore. Still, Moore's presence can be felt throughout. There is little ideological bias, and all of the papers are deeply rooted in the real world. Economists who make their living with forecasts would do well to pick up this book.

William S. Brown

University of Alaska-Southeast