The Great Unravelling

Is our economists learning?

Which eras are those of moderation, and which are those of excess volatility? What did the central bank succeed in stabilizing as a result of relying on interest rate adjustments rather than income flow adjustments?

Deficits: 1950-1980 versus 1980-2010 — which is more moderate?

Deficit to GDP ratio

Leverage: Domestic Non-financial debt/GDP 1950-1980 versus 1980-2010:

Which era is “moderate”?

Balance on current account 1950-1980 versus balance 1980-2010:

Moderation in balance on current account/GDP


moderation in unemployment

Male unemployment:

moderation in male unemployment

Female unemployment:

Moderation in Female Unemployment?
Moderation in Female Unemployment?

And, more troubling, long term unemployment, which is what people really fear:

long term unemployed/labor force

Has there been moderation in investment?

Moderation in investment/GDP?

What about moderation in relations between workers and firms?

real corporate profits and real wages

Moderation in worker pay:

Compensation and productivity

How about financial stability? From 1950-1970 there were no banking crisis or currency crises in the developed world. How about since?

banking crises

FDIC actions (both assistance and failures):

Moderation in bank bailouts?

How about moderation in income distribution?

Moderation in Income Inequality?

I believe economic historians will look back at this period not as the “Great Moderation”, but as “The Great Unravelling”. An unravelling of the social contract between workers and firms, of the government’s fiscal position, of trade balances, investment, and inequality. It was a time when the top 1% took the money and ran. It was a great slicing and dicing of the human capital of this country, resulting in less income mobility, less employment dynamism, and great fear among the eroding middle class.

As any act of robbery, it was an adjustment process rather than a sustainable form of economic management. That it occurred slowly over several decades does not make it more viable. All such unravellings eventually run their course and are complete.  The nation as a whole is far poorer for it, and rather than trying to return to the status quo ante, we will need to find new social bargains and new forms of economic management to undo the damage that was done over the last thirty years.

The Great Unravelling

8 thoughts on “The Great Unravelling

  1. Mark A. Sadowski says:

    To nitpick, the Great Moderation was a global phenomenon and refers primarily to a historical reduction in real output growth variability. Consequently, by definition it cannot include the deep recessions of 1981-82 and 2008-2009. Based on statistical analysis there was a sharp reduction in US real GDP growth volatility in 1985 so this is the year most often assigned as its start. In my opinion it ended in 2005. I base that primarily on the fact Bernanke took over the chairmanship in 2006, and this meant a shift away from Greenspan’s “constrained discretion” to Bernanke’s more dogmatic Inflation Targeting regime and all it entails for our current economic era.

    1. You are welcome to start counting in 1985. The point being that volatility in the form of currency crises, leverage, current account imbalances, deficits and similar factors was large in this period, even if you stop counting in 2006 — which seems odd. Underlying trends suggest that the low output volatility was not sustainable — i.e. the deflation at the end of 2008 was not independent of the runup in leverage in the preceeding period, even if such a runup allowed for a superficial appearance of stability.

  2. Let’s go back to 1971-1973; the gold window and fixed exchange rates were no more. Tax and borrowing were no longer needed per se to spend since the U.S. and other sovereign goverments issued their own currencies based on the GF&C of their governments. Balancing the Federal budget would be an operational anachronism.

    What we see following Nixon’s abandonment of the gold standard and later fixed exchange rates, are massive cuts in taxes for the rich. They got the memo, but politicians, media, academics, other economists couldn’t assimilate the paradigm shift in monetary policy which by definition meant that taxes would no longer pay for anything in a nation issuing its own currency in any amount it chose for any reason. Politicians didn’t get it, that such a government could, by “fiat”, issue dollars even if revenues were zero..

    Now the rich had surpluses with which to begin the financializtion of America, which would, in the ’80s, take off in earnest as Greenspan manipulated additional tax cuts for the rich and doubled the effctive marginal income tax rates for workers by raising FICA.
    Yes, 1985 is a kickoff point but it all begins with the abandoning the gold standard. This can be seen in Figure 2 on Income distribution from 1973 to 2005.

    Im Jus’ Sayin.

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