Post-World War II Stabilization Policy

Visuals for November 19, 2008 Post-WWII Stabilization Policy Lecture:

Comments

[Michael Carroll]

The table Federal Debt 1940-2012 has no key. Can't interperete the blue versus red curves without that.

[john]

"The Great Moderation" sure looks like an artifact of the 1982 recession to my poorly-educated eyes. If you just chopped the recession off at, say, 8% unemployment, there'd be no visual evidence of it at all.

What am I missing?

[low-tech cyclist]

I'm good with reading y=f(x)-style graphs such as the first half-dozen on this page. But the last five...is there a guide somewhere on the Intertubes that shows how to read graphs like this? I never quite 'get' them.

[Adam Lee]

If you could put some markings on the X and Y axises that would be great.

[christofay]

We didn't practice Bagehot, good for the lender interest rates against good collateral.

We practiced Bernanke, good for the borrower interest rates subject to even more liberal revision against mystery meat.

We have had an excess of liquidity, the i-banks increased leverage from 12 to 35 times capital. We didn't have a bubble in housing, we had a bubble in leveraged finance. So what is the cure for that?

[Jeffrey Kramer]

"Inflation-Unemployment" 1983-2007: I see a bucking bronco and its rider.

[a]

IMHO the graph of debt as a percentage of GDP masks the real story, because it ignores how much private debt as a percentage of GDP has exploded. The government can run a bigger deficit when its citizens are savers.

[Chris]

I agree with John about the Great Moderation; furthermore, 1954-1974 looks equally moderate, but that period of calm clearly didn't indicate a permanent change that would have prevented the big recessions that followed.

BTW, if Reagan presided over the biggest recession since WWII, *despite* the fact that it closely followed Carter's and therefore particularly inefficient companies should have already been dead (according to the standard explanation of why recessions are good for the economy the same way lions are good for zebra herds), why do people hold him up as a model of competent stewardship of the economy? Sheer political hackery, or is there something I'm missing here?

In any case, there's no good reason (AFAIK) to believe that the later moderation would be any more permanent than the 1954-1974 one, and indeed it now looks like it may well not be.

Don't they teach courses in how to spot and avoid irrational exuberance in economics and/or business school? (The cynic in me says the probably teach how to promote your exuberance and convince others to share it without regard to its irrationality, instead.)

[William]

Chris,

What you are missing about the recession in the early 80s can be seen in the graph just below the unemployment graph. Inflation in the early 80s was still in the double digits. That recession was largely the result of the Fed squeezing inflation out of the system.

You and John have interesting points about the Great Moderation, though. An idea that I have been thinking about (and no have no solid evidence for whatsoever) is that there appears to be a 40-year cycle. After the meltdown of the 1930s, the US followed the path of believing in the ability of the government to effectively manage the economy. This worked well for a while, but then came unhinged in the 70s. This ushered in an era of a belief that a free market economy can regulate itself. This also worked reasonably well for a while (the "Great Moderation" period), but now seems also to be coming unhinged. The question is, do we now recognize the flaws in both approaches and strive for some reasonable middle ground, or do we just repeat the whole process all over again?

There are a lot of gross generaliztions here. The economy of the 40s, 50s, and 60s was far from socialist and the economy of the 80s, 90s, and 00s was far from libertarian. But, the story does more or less fit the data.

[MattYoung]

Noticed the Phelps rule on inflation and unemployment has been milked for all its worth. Over the years, the relationship has become steeper so that we sit right at the equilibrium point, and any move off that point throws us into a restructure.

All the income streams seem to become attached to a hedge of some sort, pensions, government mandates, and direct hedge funds. It looks more and more like a giant unwinding of all our federal guarantees is happening.

[MattYoung]

Isn't that spelled Phillips, sorry.

[john]

Does the unemployment graph take into account changes in the definition of the unemployment rate?