Economic volatility declines in U.S.A.

February 7, 2001

Free Market Foundation

Economists say there is considerable evidence something wonderful happened to the U.S. economy beginning in 1984. Since then it has become much less volatile. It has stabilised and may be able, permanently, to avoid the wild swings characteristic of pre-1984 patterns.

In the December 2000 American Economic Review, Margaret M. McConnell of the Federal Reserve Bank of New York and Gabriel Perez Quiros of the European Central Bank pinpoint the first quarter of 1984 as the period when “the break” with the old volatile pattern began.

Here is an explanation of what happened:

Private sector changes in organisation and technology have calmed the durable goods sector of the economy which used to be its highly volatile component.

Durable-goods makers adopted techniques of lean manufacturing and just-in-time logistics.

Producers now have more accurate and up-to-the-minute information about what’s selling and their plants are able to shift their product mix more quickly thereby avoiding the build up of high inventories.

It was the backlog of inventories when an economic downturn occurred that led to sudden and sharp cuts in production and the massive layoffs that only further aggravated the economic decline.

Researchers point out that progress, not policy, is responsible for the new, more stable environment. Many believe the transition to be a permanent fixture of the new information technology economy.

Source: Virginia Postrel (Reason magazine), Economic Scene: The Roots of Stable Expansion Will Extend Well Beyond the Greenspan Era, New York Times, January 25, 2001; see also Margaret M. McConnell, Patricia C. Mosser and Gabriel Perez Quiros,A Decomposition of the Increased Stability of GDP Growth, Current Issues in Economics and Finance, September 1999, Federal Reserve Bank of New York.