The Simple Analytics and Empirics of the Cyclical Profit Squeeze and Cyclical Underconsumption Theories: Clearing the Air

This paper examines the controversies that exist between the cyclical profit squeeze (CPS) and nutcracker theories of cyclical crisis. The-simple analytics and empirics of both theories are examined. It is shown that the criticisms of the CPS advanced by Sherman (1997) are invalid, and that the two components of the nutcracker theory—a cyclical underconsumption crisis plus a non-labor cost-induced decline in profits-have little relevance for explaining postwar U.S. business cycles.