Sunday, February 19, 2012


You probably won't be able to tell from my post here, but I actually liked Josh Hendrickson's post -- and also the one Marcus Nunes links in his comment there. So you know.

From Nominal Income and the Great Moderation at The Everyday Economist:

The period from 1984 through 2007 was one that exhibited a marked decline in macroeconomic volatility. As such, it is commonly referred to as the Great Moderation. This period has potentially important implications for policy. If, for example, the reduction in volatility was the result of smaller “exogenous shocks” to the economy, then we can largely view the period as one of good luck. However, if the reduction in volatility can be linked to a change in policy, then this period can potentially provide guidance as to how policy should be conducted in the future.


Not too much macroeconomic volatility in the Dark Age, either. Sometimes I don't understand where people are coming from. It's not just this guy, Josh Hendrickson, who wrote the post. It's the whole notion that "moderation" is "great".

No. It's bigger than that. Or smaller, probably.

First there was the golden age. The economists of the time had basically nothing to do with that, but that didn't stop them from saying things like President Lyndon Baines Johnson's Budget Director Charles L. Schultze said: "We can't prevent every little wiggle in the economic cycle, but we now can prevent a major slide" (reported in Time magazine, 31 Dec 1965).

Later came the great moderation. Economists really had little to do with this, either, except possibly by accident -- as is suggested by Josh Hendrickson's ambivalence regarding luck versus policy as the source of the moderation. But that didn't stop them from saying things like "My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades." - Robert E. Lucas, Jr. (PDF), January 10, 2003.

History is written by the victors -- and economic history is written by people claiming to be right. Reminds me of what I wrote in Christina at '50:

The paper presents the myopic and egotistical view that '50s policy was right because it is comparable to modern policy.

The authors write: "We show that policy in the 1950's was actually quite sophisticated." They do not say "actually quite sophisticated by present standards;" but that is clearly what they mean.

They do not say "the policy of the 1950s was surprisingly sophisticated," which would have expressed surprise. They say policy was "actually quite sophisticated." The words actually quite seem to suggest arrogance rather than surprise -- as if coming from a position of modern superiority.

See? I'm doing it, too.


Sackerson said...

I suppose volatility was less because the tide was rising so rapidly. Can I suggest you look at your stats and see if boom periods generally have lower volatility, and deflation higher volatility?

The Arthurian said...

Just off the top of my head, Sackerson, the "free banking era" 1936-1863 or so had some pretty darn good growth (see graph here) AND some pretty significant volatility.

My "suppose" is the opposite of what you have written. Real US GDP peaks are all low after 1984, compared to earlier peaks ( FRED ) while the low points after 1984 are about as low as lows before 1984 -- but there are fewer.

Sackerson, I like your suggestion. Do you have any techniques to suggest for measuring volatility? That would help a lot.

I remember a post Jazz did on it a couple months back; maybe I can find that.

Anybody else have an idea?

Thanks, Sackerson.