In his latest post on The Money Illusion, Scott Sumner presents an interesting look at unemployment and recessions.

There’s an interesting pattern there.  When the unemployment rate stops falling, we usually have a recession within about 18 months.

One exception is 1966.  During late 1966, it looked like we were entering a recession.  But the Fed put the pedal to the medal and we avoided a recession until the very end of 1969.

I feel fairly confident that the unemployment rate will stop falling within a couple of years.  I doubt it can go below 3%.  If so, we will enter a dangerous period for the economy.  The Fed will try to engineer a “soft landing”, but so far it’s had little luck. (And even if I’m wrong and unemployment falls to 2.5%, it merely puts off the day of reckoning by a year or so.)

It’s a great post and I normally wouldn’t have that much to say about it because it’s technically sound. But, because there isn’t any analysis about why the unemployment rate stops falling while pointing out that there is a recession usually within 18 months, it may be unintentionally misleading, and I thought it might be a good idea to point out that in all but two recessions since the late 1940’s, NGDP growth fell to zero just prior to the shaded areas that delineate recessions on the graph.


It gets even more interesting when the unemployment rate is added to the NGDP graph because, at least I can notice that, the unemployment rate generally doesn’t start rising until NGDP growth has fallen considerably close to zero.


So, the tone of the post that doesn’t point the finger directly at the Fed for engineering the whole episode could use some clarification.

Of course, being the rebel, rabble-rouser that I am, I’d take it to the next level of questioning “why”, and ask the forbidden question: Why is this pattern the rule rather than the exception? We’re not talking about taking out the trash here. We’re talking about a means of survival for many that gets tossed up upon the alter of sacrifice for some reason. Additionally, for each of these recessions, there’s an output gap to trend that is quantifiable, and the fact that I have never seen any cost/benefit analysis for any of these is somewhat unsettling.

It isn’t clear to me that the recessions shown here were unavoidable or necessary. Rather, nearly all of them appear discretionary. And I think that the only reason that we’d be entering a dangerous time for the economy when the unemployment rate stops falling is because the root cause of why the unemployment rate stops falling leads to a recession continues to remain unaddressed. Congress may have tried to address it with the Full Employment and Balanced Growth Act, but it really hasn’t ever tried to give the mandates teeth. Thus it might as well have passed a law telling the Fed to do whatever it pleases, like a herd of cats, because the Fed’s unjustified discretionary tyranny is what we get anyway.