DEBATING THE SOURCES OF BUSINESS CYCLES

In organizing this book it seemed natural to follow the first part on the sources of long-run productivity growth by a second part on cyclical fluctuations in productivity growth. Yet for many readers this would seem like following an elephant with a mouse. Everyone can understand why long-term growth is a compelling topic, but the significance of cyclical fluctuations in productivity growth may be elusive. Why should we care if productivity growth sometimes grows faster or slower than normal for a few quarters or years, when clearly what matters is how fast it grows on average over several decades? One answer is that there is a current, hotly debated application, the need for a method of decomposing the cyclical and structural components of the post-1995 productivity growth revival in the United States. To what extent does that revival represent a structural event reflecting an underlying acceleration of technical change, and to what extent was the revival based on unsustainable cyclical factors (e.g., falling unemployment, high-tech stock-market bubble) that allowed U.S. output to grow at faster than its sustainable rate, especially in 1999 and early 2000?

Yet, despite its marginal importance as a macroeconomic phenomenon, the debate about the sources of these cyclical fluctuations in productivity growth has played a surprisingly large role in the development of macroeconomic thought over the two decades after 1980. The traditional “Keynesian” view emerged from the catastrophe of the Great Depression.