The charge about the old days of the American economy—the nineteenth century, the “Gilded Age,” the era of the “robber barons”—was that it was always beset by a cycle of boom and bust. Whatever nice runs of expansion and opportunity that did come, they always seemed to be coupled with a pretty cataclysmic depression right around the corner. Boom and bust, boom and bust—this was the necessary pattern of the American economy in its primitive state.
In the modern era, all this was smoothed out. There were busts, above all the Great Depression, but these represented the last gasp of the old order. Since the rise of the governmental sector as a major component of the economy at the time of President Franklin D. Roosevelt, federal institutions, ranging from the income tax to the spending authority to the Federal Reserve, could ensure, through “counter-cyclical” policy, that the natural tendency of capitalism toward boom and bust could be smoothed out.
Such was the prevailing view for so long among the paladins of economics and economic policy. If there was one figure who made his living reiterating this theme, it was Yale economist Arthur Okun, who was Chairman of the Council of Economic Advisers under President Lyndon B. Johnson. “Okun’s law” (a relationship between growth and unemployment) remains a mainstay in the research shops of the Fed and the White House, and other establishmentarian places, to this day.
Yet with the Great Recession by no means put to pasture five years in—GDP growth for this year was just revised down last week to an anemic 1.8% —we have to start wondering if it is rather the modern era that is the one afflicted with an unholy cycle, of economic boom and bust.
The initial thinking in this direction came from Stanford economist John B. Taylor, who for some years now has been pointing out that since World War II, one period was notably more good and stable, from a macroeconomic perspective, than the others. This was the generation preceding the Great Recession, 1982-2007, a span which on the lead of Prof. Taylor’s work is often referred to as the “Great Moderation.”
What put the great in the great moderation was not necessarily the rate of growth. Growth was just fine in this era—3.3% per year in real terms, exactly the rate of growth that prevailed in the long post-World War II run that is so famous, 1945-73. What was great in the quarter century after 1982 was the sparseness of the recessions. When they came, you barely noticed them. There were only two, 1990-91 and 2000-01, the latter not even counting as a recession by the old rule of needing two consecutive quarters of negative growth.
After 1945, recessions not only were more frequent; they were steeper. There were recessions in 1945, 1949, 1953, 1957, and 1960 (1957 having a deeper two-quarter decline than seen in our Great Recession), before finally a nine-year run came sans recessions.
But then stagflation came, with double-dip recessions in 1969-70, 1973-75, and 1980-82. Against conventional metrics, it still remains questionable to say that the Great Recession was worse than what hit in 1973-75 and 1980-82. The president seems bent on this interpretation, given his penchant for saying ours is the worst economic crisis since the Great Depression. The only thing we can be sure of is that the recovery since 2009 has been worse than the recoveries from every one of the various recessions listed above.
The ready lesson to be taken from the Great Moderation is that the single greatest era of good, stable growth in the modern era occurred in an environment where the governmental sector was if not in retreat, then in a posture of self-criticism and restraint. The Federal Reserve was obliging rule-based behavior that probably included making the price of gold a primary determinant in monetary policy. Tax rates went down in major fashion in 1981 and 1986, with the increases of the 1990s clawing back only a small bit. Spending peaked in 1983 and fell remorselessly through the Bill Clinton presidency.
In its latter stages, the Great Moderation (that of the George W. Bush presidency) saw some further tax cuts, but a complete reversal on spending. The level of federal spending in 2000 (18% of GDP) turned out to be a trough, going up first two more points under W. and then by a further 25% under Obama. This is not to mention a Fed that has cottoned to experimentation like never before.
Whatever you want to say about the nineteenth century, you have to look far and wide for Great Depressions, serial recessions, stagflations, and Great Recessions. The Great Moderation must have been too close for us to realize its unique excellence. For the reality just might be that in an epoch of history when the government thinks it can run the economy, extended underperformance will be the rule, and the continued march of prosperity the exception.
Books on the topic discussed in this essay may be found in The Imaginative Conservative Bookstore. Originally published at Forbes.com the essay is reprinted here with gracious permission of Brian Domitrovic.