The arrival of the cyclical event, in due time, makes the negative underlying trend more visible. At first people blame everything on the cycle/crash, but a look at the slow recovery, combined with a study of pre-crash economic problems, shows more has been going on.
Read the whole thing. I found it difficult to excerpt.
If you insist on Keynesian methodology, then trend and cycle are separate by construction. You wait until there is full employment, and then you draw a line connecting the full-employment dates and call that the trend.
In real time, this does not work so well. In the 1970s, we never got back to what was thought to be full employment. So economists had to first re-define full employment as the NAIRU and then allow for drift in the NAIRU. In fact, to speak of NAIRU drift is to speak of a phenomenon that is neither purely trend nor purely cycle.
From a PSST or Schumpeterian perspective, there is no distinction between trend and cycle. There are booms, during which new projects are launched with optimism while the businesses they are destined to destroy continue in blithe ignorance or denial. There are busts, during which out-moded businesses get shut down but entrepreneurs have not yet figured out uses for the resources that have been freed, and for various reasons unemployed workers appear to have higher reservation wages than their value to firms.
The idea that what is described as a cycle is more like the recognition/amplification of a trend makes sense to me.
Note also the new paper by Acemoglu, Autor and others on the role of imports in what they call the “employment sag” that has taken place since 2000. The macroeconomic story may ultimately be less about the 2008-2009 financial crisis and more about the challenges that the economy faced in dealing with the great factor-price equalization.
There does still seem to be a place for cycles. Profit margins and sentiment have self-reinforcing buildups followed by complacency then catastrophe then overshoot on the way back to the mean. This may tend to get kicked off by real or imagined trends. Or to put the trend and cycles together in Buffet speak you have the innovators then the imitators then the idiots. But if there is no trend and no cycle, wouldn’t we make one up?