Studying 'growth cycles' to steer the economy; Professor's work focuses on the growth aspect of boom-bust action
Victor Zarnowitz is one of seven economists who determine the dates for the start of business recessions and expansions in the United States, and he figures the current slump started in late summer.
Those seven business cycle experts, all associated with the National Bureau of Economic Research, will probably meet in January to make an official pronouncement of the starting date. But if August or September is chosen, the nation will have experienced its shortest economic expansion, having lasted only 13 or 14 months.
''There seem to be changes in the economy we do not understand fully yet,'' says Dr. Zarnowitz, a professor at the Graduate School of Business, University of Chicago.
There was another short expansion lasting from April 1958 to April 1960, about two years, during the Eisenhower presidency. Tight monetary policy brought to a halt both that expansion and the most recent expansion.
Dr. Zarnowitz has been doing a study of a cyclical phenomenon which, he hopes , will enable economic policymakers to make better judgments of the status of the economy and thus make better policy decisions. It's called the ''growth cycle.''
Most everyone knows what a ''business cycle'' is. It is a combination of an economic boom and bust; or, in milder terms, a period of growth and of recession; or, in more technical language, an expansion plus a contraction.
A growth cycle is similar. Dr. Zarnowitz explains in a new research paper for his bureau that the long-term growth trend may be interrupted either by a cyclical depression (or recession) or by a similarly long period of subnormal, although still positive, growth (slowdown) - indicating a growth cycle.
The process of long-term economic growth is ''real'' in nature: driven by increases in the quantity and productivity of human and physical resources and measured by advances in output and wealth per capita. Most economists figure that the business cycle and ''growth cycles'' are also affected by changes in monetary factors.
Further, Zarnowitz notes that growth has been historically pervasive and persistent in the modern era. Nearly every business expansion in the United States has carried total output and employment beyond the levels reached at the peak of the preceding business cycle. Severe depressions have reduced growth strongly for some considerable time. Vigorous expansions have raised growth rates correspondingly. But most of the no fewer than 33 complete business cycles in the US between 1834 and 1975 have been mild. And few peacetime cycles resulted in major disruptions of the secular growth trend in the economy.
(Another cycle expert, Leonard H. Lempert, director of Statistical Indicator Associates, notes that the low in the current recession might fall below the low point of the 1980 recession. This would be unprecedented in the postwar years.)
This does not mean, Zarnowitz continues, that growth has been uniform or that no connection exists between cyclical variability and growth. In a century of US progress, he identifies four periods marked by relatively high economic stability and four others during which stability was comparatively low.
Each period includes a sequence of two, three, or four complete business cycles. For instance, he puts the 1948-69 period, which includes the Korean war and most of the Vietnam war, into the high-stability, high-growth category. The years 1969-80, however, go into low-stability, low-growth classification. These were the years when the Vietnam war was wound up, but which inherited most of its delayed inflationary effect.
Zarnowitz speaks of the contrast between ''the turbulent 1970s, dominated by seemingly uncontrollable inflation, recessions, and energy problems, and the economically much more placid and prosperous decades of the 1950s and 1960s.''
His examination suggests that growth in real gross national product (the total output of goods and services, or GNP) was generally higher during the multicycle periods when stability was greater. The average annual growth rate in these ''good times'' was 4 percent. Or, to reverse the finding, both protracted high unemployment and protracted high inflation impede growth. Underutilization of productive capacities tends to reduce investment and tilt downward the potential output curve. Uneven and largely unanticipated inflation impairs the signaling function of relative prices and acts as a bad tax, distorting resource allocation, hindering saving and productive investment, and fostering speculative activities. In these unstable times, GNP growth ran 2.6 percent on average.
Nonetheless, in the quarter-century after World War II, business cycles have indeed been mild by historical standards.
Looking at the postwar period before the 1970s, Zarnowitz reckons that ''discretionary fiscal and monetary policies had a mixed record (in reducing cyclical fluctuations), but not without some relative successes.'' In the past decade he finds, however, that national policies ''oscillated between attempts to combat inflation and attempts to combat unemployment, with poor timing and for the most part indifferent or perverse results.''
Every postwar recession has been preceded by a growth cycle slowdown. Zarnowitz hopes that by detecting such slowdowns, policymakers can make wiser antirecessionary actions. The problem is that there have been three slowdowns in the postwar period which were not followed by recessions. So the trick will be to differentiate, which isn't easy.
But since Dr. Zarnowitz does not advocate extreme anticyclical measures - only, say, slight shifts in monetary policy - that problem may not be too important. The policy shift would counter both a slowdown or a recession.