This is a great post by rsj, The Great Unravelling:
“Which eras are those of moderation, and which are those of excess volatility? What did the central bank succeed in stabilizing as a result of relying on interest rate adjustments rather than income flow adjustments?”
The charts are extremely interesting. In many ways, the great moderation was not moderate at all, and the charts show this in great detail.
The great moderation- or the smoothing in global output growth – came at a cost. Was this cost too high? It’s easy to make this argument.
rsj makes a great point about what really matters to people: “And, more troubling, long term unemployment, which is what people really fear:” and shows long term unemployment went up, up, up during the great moderation.
Mark S’s points out the Great moderation is defined to exclude the two biggest problems in its time frame. Mark is right, but this is a way proponents of the Great Moderation cheat.
It’s a must read, simply for the data dump.
Seems like a selective use of charts if you ask me, I can easily show moderation if I use a different selection. I normally define the ‘great moderation’ as the period between the late eighties to the early 2000s, as would most I believe, so the spikes at the end shouldn’t be included (remember, moderation does not imply sustainability).
This implies a moderation in the volatility of growth:
http://upload.wikimedia.org/wikipedia/commons/a/a8/TheGreatModeration.png
(this is the literal definition of the great moderation btw)
Moderation in inflation:
http://tomorrowseconomy.files.wordpress.com/2012/05/other-great-moderation.png
And employment:
http://2.bp.blogspot.com/_pMscxxELHEg/S7X1U0Ub0hI/AAAAAAAAH8A/uusb2PKww98/s1600/EmployPopMarch2010.jpg
which is what even those unemployment graphs show, with the spikes in unemployment being lesser and coinciding with greater declines.
You can also get different accounts of compensation depending on the measures of productivity you use, in general it’s probably better to look at labour productivity rather than specifically productivity:
http://www.federalreserve.gov/newsevents/speech/krozner20060927chart1.gif
Moderation of financial stress; there isn’t data for before the nineties but the period during the nineties is shown to coincide with very little financial stress:
http://research.stlouisfed.org/fred2/series/KCFSI
http://research.stlouisfed.org/fred2/series/STLFSI
I’m not even close to saying this was sustainable, but I dislike it when people act as if the nineties (or the growth in living standards and the decline in price volatility during the nineties) didn’t happen.
The point is this had a real cost, and other parts of the macro economy were less stable. There is no doubt there was a moderation in growth variability, and some macro-economic measures had smoother times.
The Great moderation implies the result was beneficial and benign. I don’t know if that’s an accurate description of what happened during the mid 1980 to mid 2000 period. There were significant economic downsides to the Great Moderation during the time period in question, even without taking 2008 into account. Taking the bust into account, there is no way the great moderation was worth it.
I think the pertinent point is whether this is a zero sum game; did ‘the bust’ arise out of things associated with the factors that caused volatility to decline during the great moderation, or was it a result of a separate set of factors?
Interesting question. It may not have been zero sum at all. But we tend to think in zero sum terms around here – accounting rules and all that stuff!
If you use the Godley/Lavioe framework, it’s instantly clear the moderation in growth must have come from fine tuning credit growth to target inflation as other variables are allowed to go wherever they want or need to sustain that “moderation”.
So you’ll have an explosion in private credit – something not moderate at all – justified to support low variance inflation.
One of my takes is about why are we applying the words “great moderation” to a period where the experience for most people wan’t very positive at all? It wasn’t great for most people, and it wasn’t moderate under many measures.
The “long stagnation” might be better. Or the “long slide”.
This is really an ideological/framing question more than anything, and I am not pretending this question is about economics. It’s about the frame implied by the words “great moderation”.
In the end, it’s a good enough term and we know what time frame it describes. But without push back, we’re doomed to just accepting the conventional view of the economy – where throwing away 10% per year in wasted time is perfectly fine and impossible to do anything about.
Moderate is a relative term, so it really depends on what time periods you compare it to. From the beginning of the country to WWII the data is littered with depressions and financial crises. Then in 50′s and 60′s we had a nice run as the only country left standing after the war and some nice infrastructure improvments to help fuel growth. The 70s to early 80s were filled with inflation and recession. From then on things looked pretty moderate compared to most of our history until 2007. The Great Moderation was pretty moderate relative to most of our history, but it also indeed came with costs. However, since throughout our entire history policy makers have rarely if ever understood economics, most of the outcomes of various time periods were a function of luck.
I would add that most of our reliable economic data series started in the 40s/50s so thats when people tend to compare to, ala FRED.
Interesting collection of graphs, but moderation and sustainability of moderation are two different ideas – the moral message of the original post is really about the latter, not the former. It could have been framed that way, rather than by suggesting the denial of something that actually happened. I think the great moderation refers largely to the fact that between the end points of the period from 1980 – 2010 (roughly), there were only two relatively mild recessions. The difference in frequency and intensity shows up clearly on the graphs. The moderation obviously doesn’t refer to the period outside of the moderation. And a number of the criticisms relate to the financial crisis end point. Again, that’s obviously not considered part of the moderation period, so it shouldn’t be characterized that way. And if the co-existence of an income redistribution trend is the litmus test, then I suppose nothing good can be said of anything. Today, income distribution is being blamed for lack of aggregate demand. So why wasn’t it blamed for lack of aggregate demand during the great moderation? Um … because there wasn’t a lack of aggregate demand on a relative basis … seems to be a disconnect of causal consistency somewhere on that one.
” It could have been framed that way, rather than by suggesting the denial of something that actually happened.”
The words “great moderation” imply that all was completely stable. I don’t think rsj is denying there was moderate inflation and relatively stable (if slowish) growth. As we’ve seen, inflation is only one of many important macro factors we could target, and it might not be the best one.
Yes, this particular selection of graphs has a strong smell of ideology involved, but to me, the words “Great Moderation” have a similar stench. Yes, the economy was great and moderate, if you discount a semi-crappy jobs market for most of the time and increasingly indebted families.
For my entire professional career, the jobs market has only been “good” for about 20% of the time. That’s the great moderation too.
“As we’ve seen, inflation is only one of many important macro factors we could target, and it might not be the best one. ”
What about targeting debt levels?
“Interesting collection of graphs, but moderation and sustainability of moderation are two different ideas – the moral message of the original post is really about the latter, not the former.”
More and more debt is not sustainable? A medium of exchange problem.
“Today, income distribution is being blamed for lack of aggregate demand. So why wasn’t it blamed for lack of aggregate demand during the great moderation? Um … because there wasn’t a lack of aggregate demand on a relative basis … seems to be a disconnect of causal consistency somewhere on that one.”
The lower and middle class who were experiencing negative real earnings growth based on their budget(s) either stopped going into debt or are unable to go into debt. So is the gov’t going into debt for them?
sounds roughly right to me
JKH, my 10:45 pm comment should have been a reply to you. Not sure if it is showing up that way.
Also, it seems to me the way the system is set up now all NEW medium of exchange has to be borrowed into existence from a bank or something bank-like. Is that right? Thanks!
sounds right again
OK about those two. Here is what I see as the most common definition of economics: unlimited wants/needs and limited resources. I believe that definition is wrong.
If the definition of economics is wrong and an economy is subjected to the central bank credo (all NEW medium of exchange has to be borrowed into existence from a bank or something bank-like) then with the models I use, a depression is a very likely outcome eventually.
What is your opinion of that?
imo, the “great moderation” was nothing more than an ATTEMPT to use more and more debt to grow and “stabilize” an economy. The problem is too much debt is actually “destabilizing”.
Goes back to Godley’s point about every economic player needs a buffer to deal with risk.
The govt has been focused on providing buffers for banks instead of ordinary people, which, paradoxically, destroyed more banks than govt overregulation ever could once people could no longer pay their mortgage.