US economy: less volatile

[Brad De Long]

>The August issue of the New York Fed's Current Issues in Economics & 
>Finance  <http://www.ny.frb.org/rmaghome/curr_iss/ci5-13.html> is an 
>interesting study of the reduced volatility of U.S. GDP growth since 
>1984: all components, as well as overall growth, have shown a 
>smoother pattern over the last 15 than earlier decades.
>
>This is somewhat counterintuitive to anyone schooled in 
>Keynesianism; the 1984 breakpoint coincides pretty well with the 
>onset of the Reagan boom, when countercyclical stabilization 
>policies were renounced and pretty much everything had been 
>deregulated. Keynesianism was supposed to stabilize the economy, 
>reduce uncertainty, and calm anxieties about the future.

I see three periods:

(i) one of successful counter-cyclical stabilization from 1948 to 
1966 or so (as set out in Arthur Burns (1959), "Progress Toward 
Economic Stability")

(ii) one of breakdown--caused by Keynesian hubris, the macroeconomic 
impact of the Vietnam War, Richard Nixon's political business cycle, 
or OPEC, take your pick--from 1967 to 1983.

(iii) a resumption of counter-cyclical stabilization policy--with 
fewer claims made for it--by Volcker and Greenspan after the Volcker 
depression. What are Greenspan's massive monetary injection in late 
1987, Greenspan's pushing of short-term real interest rates below 
zero in 1992, or Greenspan's "preemptive strikes" against inflation 
in 1994 and subsequently but counter-cyclical stabilization policy? 
They certainly ain't Milton Friedman's constant-money-growth rule.

Of course, if you will ask Greenspan whether he is pursuing activist 
counter-cyclical stabilization policy he will fuzz the issue...

Brad DeLong