Thomas Mann and the business cycle

We need a new term for "hard times"

In Thomas Mann’s novel entitled The Magic Mountain, there is a discussion of calendars:

The days get longer during winter, and we get to the longest one, the twenty-first of June, the beginning of summer, they start getting shorter again and it all heads back downhill toward winter. You call it obvious, but you disregard the obvious part, it can momentarily set you into a panic, make you want to grab something to hold on to. It’s really like some great practical joke, so that the beginning of winter is actually spring, and the beginning of summer is actually autumn. It’s as if we’re being led around by the nose, in a circle, always lured on by something that is just another turning point—a turning point of a circle. For a circle consists of nothing but elastic turning points, so that its curvature is immeasurable, with no steady, defining direction, and so eternity is not ‘straight ahead’ but rather ‘merry-go-round’.” . . .

“Midsummer night!” Han Castorp said. “Midsummer night celebrations, with fires and dancing around the leaping flames, everyone joining hands. I‘ve never seen it, but I’ve heard that’s how primitive tribes do it, celebrating the first night of summer, which is actually the beginning of autumn—the year’s high noon, its zenith, and it’s all downhill from there. They dance and whirl and cheer. And what are these primitives cheering about—can you explain that to me? Why are they so boisterous and merry? Because they are now headed back down into the dark, maybe? Or is it because things have gone uphill until now, and the turning point has come, the slippery turning point, Midsummer Night? Is it melancholy mirth at the high point? [John Woods’ translation, p. 365.]

Let’s try that again, substituting in some business cycle terms for the calendar concepts:

The economy gets more prosperous during the expansion, as we approach the business cycle peak, the final month of expansion, the peak of prosperity. At that point the economy immediately starts getting worse and it all heads back downhill into recession. You call it obvious, but you disregard the obvious part, it can momentarily set you into a panic, make you want to grab something to hold on to. It’s really like some great practical joke, so that the worst of recession is actually the beginning of expansion, and the peak of prosperity is actually the beginning of recession. It’s as if we’re being led around by the nose, in a circle, always lured on by something that is just another turning point—a turning point of a cycle. For a cycle consists of nothing but elastic turning points, so that its curvature is immeasurable, with no steady, defining direction, and so eternity is not ‘straight ahead’ but rather endless business cycles. . . .

“Prosperity!” Han Castorp said. “Boom-time celebrations, with fires and dancing around the leaping flames, everyone joining hands. I‘ve never seen it, but I’ve heard that’s how primitive tribes do it, celebrating the business cycle peak, which is actually the beginning of recession—the cycle’s high noon, its zenith, and it’s all downhill from there. They dance and whirl and cheer. And what are these primitives cheering about—can you explain that to me? Why are they so boisterous and merry? Because they are now headed back down into the dark, maybe? Or is it because things have gone uphill until now, and the turning point has come, the slippery turning point, Prosperity? Is it melancholy mirth at the high point?

People often assume that the term “expansion” means good times, whereas “recession” means bad times. Not so, at least not to economists. In business cycle terminology, expansion means improving times, whereas recession means worsening times. Weirdly, expansion does not mean boom, but contraction does mean recession. We are missing a term for the opposite of boom.

On average, unemployment is about the same during expansions and recessions. It may not seems that way, because in recent business cycles the average unemployment rate has been somewhat higher during recessions than during the subsequent expansion. But that’s due to the fact that the natural rate of unemployment has been trending downward since the 1980s, so we tend to recover to a lower unemployment rate than where we started.

Prior to the 1980s, however, the natural rate of unemployment was trending upward, and the average unemployment rate during recessions was actually lower than during the subsequent expansion:

[BTW, FRED really screwed up their graphing function.]

Suppose you asked a few thousand people the following question: “In which of the four seasons (winter, spring, summer or fall) are the days the longest?” How would they answer this question? I suspect that summer would be the overwhelmingly most popular answer, even though days are just as long during springtime. Why is summer likely to be the most popular answer, and not spring?

One possibility is that in a technical sense we break the seasons up by the various equinoxes, which partly but not entirely correlate with temperature. Thus in the eastern US, the warmest day is roughly July 25 and the coldest day is roughly January 25. We could have decided to call “summer” a 3-month period centered on the warmest day.

So our seasons are based on light, not heat. Spring and summer are the two light-filled seasons, and fall and winter are the two dark seasons. But while spring and summer have equally long days, summer is considerably warmer than spring. And if you think of summer as “the warmest time”, then it really is true that summer has longer days than spring. The three months centered on July 25 have more sunlight than the other three seasons.

[A temperature-based definition would have created some problems, however, as the warmest day in California comes later much than in the East. Believe it or not, the warmest three months in Southern California (July, August and September), actually have slightly shorter days than the previous three months. It doesn’t seem that way because they are much sunnier.]

Similarly, instead of business cycle expansions and recessions, we could have divided the business cycle up in a different fashion. Let the term ‘expansion’ refer to increasing output and ‘contraction’ refer to declining output. Then the term ‘boom’ could have referred to a high level of output, and the term ‘recession’ could have referred to a low level of output. In my view, this alternative framework is closer to how the public actually thinks of business cycle terminology.

Back around 2012, there were press reports that many people still thought that the economy was in recession, even though it had been in expansion for three years. But if you assume the public viewed the term ‘recession’ as a low level of employment and output, rather than declining output, then their supposed “mistake” makes perfect sense. (This is not to exonerate the public from stupidity, lots of people thought we were in recession during 2023, when the economy clearly was booming.)

The human mind often seems to have trouble grasping the distinction between levels and rates of change. Falling gets conflated with “low” and rising gets conflated with “high”. A poll taken back around 1990 showed than most people thought inflation was higher than in 1980, which is absurd. But if you assume the public conflates “inflation” with “cost of living”, then their responses made perfect sense. The cost of living was much higher in 1990 than it had been in 1980.

Are Americans better off today than in the 1960s? Well, they are richer today, but their living standards were rising faster in the 1960s. What does ”better off” even mean? Does happiness come from a high level of consumption, or a fast rising level of consumption? I have no idea. Most NBA fans know that it’s more enjoyable to see your team win 42 games, after winning 24 the previous year, than seeing your team win 46 games, after winning 64 the previous year. Hedonic set points, etc.

Interestingly, if the US economy were ever to start having “soft landings”, then the claims made in this post would no longer apply. Expansions would become consistently more prosperous than recessions, as the economy would maintain a high plateau for a considerable period after the labor market fully recovered.

There are many different ways of describing the cause of the Great Recession. Here’s one of them: The Great Recession occurred because the Fed focused too much on growth rates and not enough on levels.

PS. I recently finished Mann’s famous novel (published in 1924), and the final two chapters felt eerily relevant to today’s world. In the penultimate chapter (entitled The Great Petulance) Mann suggests that the European mood became extremely aggravated just prior to WWI. In the final chapter (The Thunderbolt), Mann suggests that the war was the inevitable result of all of that anger. I’m nearly 70, and I’ve never seen the level of almost hysterically childish petulance that we’ve experienced in the political arena over the past 4 weeks. I don’t expect another world war, but I also don’t expect this to end well.

PPS. After I wrote this I saw a good example of petulance in a puerile tweet from JD Vance. Niall Ferguson exposed Vance’s childishness in a calm and measured response. Until now, Ferguson has been a Trump supporter, but Trump’s recent shift to a pro-Russian position was too much for him to stomach. Ferguson is an example of what I meant when I said that too many right wing intellectuals were insufficiently aware of Trump’s flaws. Occasionally (as on Jan. 6) they briefly wake up, but then they go back to sleep.

PPPS. Yoshitoshi produced a series of triptychs showing the four seasons. The most popular one is Summer, but Winter is my favorite: