1. Lectures in Macroeconomics- Charles W. Upton What Business Cycles Cost Us Part 3

2. What Business Cycles Cost Us – Part 3 The Answer  0.015 Eliminating business cycles is worth as much as a 1.5% increase in consumption.

3. What Business Cycles Cost Us – Part 3 The Answer  0.015 Eliminating business cycles is worth as much as a 1.5% increase in consumption. Since C runs about $7,000 billion per year, this is equal to about $105 billion per year.

4. What Business Cycles Cost Us – Part 3 The Answer  0.015 Eliminating business cycles is worth as much as a 1.5% increase in consumption. Since C runs about $7,000 billion per year, this is equal to about $105 billion per year. A caution: there are some assumptions about volatility, etc.

5. What Business Cycles Cost Us – Part 3 The Answer  0.015 Eliminating business cycles is worth as much as a 1.5% increase in consumption. Since C runs about $7,000 billion per year, this is equal to about $105 billion per year. A big number but not the biggest number

6. What Business Cycles Cost Us – Part 3 Moreover While Business Cycles have costs, it is also costly to eliminate them.

7. What Business Cycles Cost Us – Part 3 An Example S SR S LR D H* w*

8. What Business Cycles Cost Us – Part 3 An Example S SR S LR D H* w* For some reason, there is an increased demand for Government Spending

9. What Business Cycles Cost Us – Part 3 An Example S SR S LR D H* w* For some reason, there is an increased demand for Government Spending The demand curve shifts to the right

10. What Business Cycles Cost Us – Part 3 An Example S SR S LR D H* w* For some reason, there is an increased demand for Government Spending The demand curve shifts to the right This is a business cycle!

11. What Business Cycles Cost Us – Part 3 An Example S SR S LR D H* w* For some reason, there is an increased demand for Government Spending The demand curve shifts to the right This is a business cycle! Obviously there will be some fluctuation in consumption

12. What Business Cycles Cost Us – Part 3 Our Options S SR S LR D H* w* Accept the cost of this business cycle Or forego the benefits of the government program

13. What Business Cycles Cost Us – Part 3 Our Options S SR S LR D H* w* Accept the cost of this business cycle Or forego the benefits of the government program Warning: there are some business cycles that are clearly wasteful and avoidable. But we don’t want to avoid all business cycles

14. What Business Cycles Cost Us – Part 3 A Second Example S SR S LR D H* w* For some reason the demand curve has shifted to the left, and we have a business cycle

15. What Business Cycles Cost Us – Part 3 A Second Example S SR S LR D H* w* For some reason the demand curve has shifted to the left, and we have a business cycle Someone proposes to address the business cycle with a bit of pork barrel spending

16. What Business Cycles Cost Us – Part 3 A Second Example S SR S LR D H* w* For some reason the demand curve has shifted to the left, and we have a business cycle Someone proposes to address the business cycle with a bit of pork barrel spending While this will eliminate the business cycle, there are real resource costs to this wasteful pork.

17. What Business Cycles Cost Us – Part 3 The Decision If business cycles are due to imperfect information, then avoiding them is 100% gain. –The Great Depression

18. What Business Cycles Cost Us – Part 3 The Decision If they are due to demand fluctuations or real business cycles, the case is not so obvious. –In part the market deals with these fluctuations already.

19. What Business Cycles Cost Us – Part 3 The 80-20 Rule 80% of the damage is due to 20% of the cycles.

20. What Business Cycles Cost Us – Part 3 The 80-20 Rule 80% of the damage is due to 20% of the cycles. –The Great Depression –The Volker Business Cycle

21. What Business Cycles Cost Us – Part 3 End ©2006 Charles W. Upton. All rights reserved