Public Domain. Source: Carpictures
In the ‘50s and ‘60s, there were all kinds of car models out there: muscle cars, coupes, sedans, and bizarre models with big tail fins and wide front ends. But ever since the ‘80s, designs seem to have converged. When you drive down the highway, you see SUVs, pickups, and generic sedans, all with soft corners and rounded fronts and rears. The desire for higher gas mileage and better crash performance, along with access to wind tunnels and CAD programs, seems to have pushed auto design into a bland middle ground.
A similar thing seems to have happened to the economy. In the mid-‘00s, many observers noted that the economy wasn’t as volatile as it used to be. From 1950 to 1980, the US experienced 7 recessions – one every 5 years or so. GDP sometimes declined by 10% or rose by 15%. From 1980 to 2000, we saw only three recessions, or one every decade. And the variability of GDP was a lot less. Economists called this the “Great Moderation.” And no one had a very good explanation.
Source: St. Louis Fed
After 1984, growth didn’t rise above 7%, nor fall much below zero, with the exception of the Great Recession. For a time, the financial crisis put to rest any thought of a moderation in GDP volatility. But the persistence of the economic expansion since 2009, even at a slower pace, has people re-examining claims that we are still in a Great Moderation.
Some credit the rise of a service-oriented economy. Some say it’s better monetary policy. Whatever the reason, it has to be universally applicable, since the moderation in growth – higher lows, lower highs – has been worldwide, not limited to the US. I think we can also rule out luck. The economy isn’t facing fewer shocks, we’re just adjusting to those shocks more efficiently.
For my part, I think the rise of information technology and its implementation via cheap and accessible computers has vastly improved enterprise management – in both heavy industry and personal services. We don’t have the sort of periodic inventory overhang that we used to. And the rise in global democracy has led to a decline in revolution and war. The world isn’t as violent a place as it used to be.
Author: Max Rosen. Source: Our World in Data
Still, it’s striking that the Great Moderation never ended, despite a financial crisis that threatened us with another Great Depression. And economists still don’t know why.
Douglas R. Tengdin, CFA