Do Economic Recoveries Die of Old Age?

by | Oct 7, 2019 | Blog, Highlights

Elliot Eisenberg, Ph.D. | GraphsandLaughs, LLC

The US economy is clearly slowing.  After adjusting for inflation, GDP grew by 2.9% in 2018, and by an even better 3.1% in 19Q1.  But growth slowed to just 2% in 19Q2, is expected to grow at a similar pace the rest of this year, and to then slow further in 2020.  According to some pundits, this rapid slowing is a clear sign we are in the final stages of this economic recovery and that a recession is fast approaching.  They point out that we are in the 11th year of this recovery, making it the longest one in history, and as such we are simply due for a recession.  Fortunately, they are wrong, expansions do not die of old age.  Let me explain.

Elliot Eisenberg

Prior to WWII, the idea that expansions were more likely to end as they got older was very common and was frequently mentioned in business and economics textbooks. And indeed, it was justified by the data.  Using a statistical technique called survival analysis, which looks at the probability of some particular event occurring given the age of the subject, be it a person or a car or sports team, it is clear that prior to WWII recessions were more likely to happen the longer the recovery.

The intuitive starting point is based on analogies to human mortality. In short, this presumption suggests that as an economic recovery ages, assorted imbalances and rigidities accumulate that hobble the economy and make it more fragile. As a result, a recovery is increasingly put at risk by smaller and smaller shocks, and it becomes increasingly likely the economic expansion will fall into recession the longer it lasts. Analogies to cars are also frequently cited. All else equal, as a car ages, the probability that it will suffer a mechanical breakdown increases. Thus, older cars are considered less reliable and generally command a lower price than new ones.

Happily, however, various postwar changes in the economy have contributed to more robust and longer-lived expansions!  One key change has been the rise in the share of services produced in the economy and the concomitant decline in goods.  This change has diminished the importance of inventory fluctuations and, as a result, has moderated the business cycle.

The role of the federal government has also drastically changed.  Since WWII, government activity has, among other things, increasingly focused on stabilizing the economy.  In short, the government has gone from a laissez-faire hands-off attitude towards the economy to a forceful, countercyclical policy. This approach has not only prolonged business cycles but has, importantly, eliminated the pattern of cycles becoming increasingly fragile as they age.  In a sharp reversal, it is now recessions that are increasingly likely to end the longer they last as policymakers take action to revive growth, such as passing tax cuts and spending increases and lowering interest rates.

In closing, enjoy the current expansion. Treat it like a good friend or a fine glass of wine and savor every extra month together. While it is almost ten and a half years old, it might well last another year, two if we are lucky. Better yet, the recession that follows is not likely to be particularly deep, as there are no asset bubbles in the making, nor are the sectors of the economy that usually drive us into recession growing inappropriately quickly.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com. 

Fighting for the Interests of Family-Owned and Operated Businesses in California

by | Sep 21, 2016 | Highlights

The Family Business Association of California (FBA) represents family businesses at the legislature and in the courts to help overcome regulatory and economic obstacles and ensure they maintain freedom to operate with as little government intervention as possible.

We are a proactive voice for family businesses in California and identify opportunities for and threats against family businesses, thereby providing a voice for solving the problems they face.

We are active in the California Assembly and Senate on a daily basis, where we support or oppose legislation based on the effect it would have on family businesses. The following are just a few of the many legislative goals we have mapped out for action.

Change of Ownership

The most important aspect of a family business is that it passes from generation to generation. Family business owners dream of the day when they can pass on what they’ve built on to their heirs. But that change in ownership could, depending on the circumstances and size of the business, trigger government reassessments and lead to increased tax burdens for family businesses.

AB 1040 was introduced during the 2015-2016 session of the Legislature. Had this bill passed, it would have broadened the definition of a “single transaction” transfer, potentially resulting in more family businesses being hit with real estate reassessments and a higher tax burden due to a transfer of ownership. Through the efforts of our organization and our many allies, AB 1040 was defeated, preserving the ability for family businesses to pass ownership on to their heirs without being subjected to undue hardship.

Fighting Unnecessary Regulations

SB 878, also known as the Fair Scheduling Act , would have required grocers, retailers and restaurants to adopt convoluted guidelines in order to change the schedules of hourly workers. Failure to follow these guidelines would have enabled any affected employee to sue, in addition to requiring businesses to compensate employees for shifts not worked or pay them a higher rate for new shifts. This would have been problematic for a number of reasons:

  • The bill would have reduced the freedom business owners and management have over their own operations.
  • It could have potentially invited legal battles that many family businesses would struggle to finance or settle.
  • Complex regulatory changes that affect routine operations often put an unfair burden on family businesses, especially if they have limited resources to handle those required changes.

FBA and our business partners defeated SB 878, ensuring these damaging restrictions won’t be forced on unsuspecting family business owners.

Other Legislation

FBA also was involved in killing a split-roll real estate tax effort that would have cost California businesses $9 billion per year and tax reform that would have placed a sales tax on services. FBA won on two legislative efforts to help reduce meritless ADA lawsuits, reforms to employee tracking requirements, and formation of a group to find solutions to cargo theft. Although it was a tough year overall, without the voice of California’s family owned businesses at the Capitol, it would have been worse.

Please contact FBA to learn more about becoming a member of our Association