Economics: The Great Moderation

[snousle]

Recent denial over the lack of a recession in Q1 has astounded me. It shouldn't.

I have come to realize that there is an enormous, glaring problem in the average person's understanding of the economy. Media reporting on the economy is all drama, drama, drama. The economist's view, in contrast, is that we have undergone a historic transformation in how the economy works. No, this is not the "New Economy" of the endlessly rising stock market. It's something much less mediagenic.

It's called the Great Moderation. It seems to me that this is the most under-reported story of my lifetime. Because it's really, really big. And really, really boring. That it's Wikipedia article should be a mere stub is astonishing. A relatively good discussion, something less dry than the Bernake speech linked above, is worth reading here.

It has occurred to me that not understanding the moderation is a driver of economic inequality. Being a pessimist means betting on volatility and change. If you believe things are going to hell, you don't invest. And if you don't invest, you get left behind. I mean "invest" in the most general sense; whether it be in money, education, relationships, whatever - it's what you do when you believe the future is in some sense predictable.

That's what bothers me about economic pessimism. This addiction to media drama is leading people to squander their resources out of fear of losing them, when they could be riding the bland wave of the Great Moderation instead.

The media response to the non-recession also makes sense in this context. When I went to dog training classes a few years back, the instructor spent some time talking about "extension behavior". When a dog misbehaves in order to get a particular result, and that result doesn't happen, the short-term response is to try harder. In this case, the yapping dog of the media, which through its noisemaking grabs our attention and sells it to advertisers, has had less and less to work with. Headlines like "Rapid rise in oil prices results in surprisingly little disruption to the economy" don't sell papers. So over the past twenty years, the media has had to yap louder and louder over smaller and smaller stories, due to the systematic damping-out of real economic drama.

It's a dysfunctional relationship, and the accumulation of cognitive dissonance is resulting in some seriously abberant behavior. Like trying to re-define "recession" so that we can satisfy the collective psychological need to be in one right now.

Comments

[snousle.livejournal.com]

I never said everything was peachy keen. And poverty is not increasing by the official measure, which is kind of telling... where do you get the idea that it is?

Nationalized health care is a rather separate issue from the well being of the economy. And I'm probably the last person in the US that still suspects higher house values might not represent a bubble, but obviously one must pay close attention to such things when it represents pretty much all your wealth.

So, in the meanwhile, if things are so awful, why are average hourly earnings and total nonfarm productivity going up, while unemployment is trending mostly downward over the past years, hmm? I can cherry-pick statistics, too, and come up with just about any conclusion I want. But I decide in advance which measures I care about and look at them, as opposed to the media, which picks the measures that are best suited for spinning up their audience. The result is consistently different.

[bitterlawngnome.livejournal.com]

I was reacting more to the senator's article. But I think the fact that you were worried about the house price says that, whether the causes were "real" or not (I don't even know what real means in this context), there was the potential there for catastrophe. Even if the market only crashes cause people are freaking out cause everyone else is freaking out, it's still a crash. I agree with you the problem is in the perceptions but isn't it always?

Anyway I should have said that basically I agree with you about the media, yes of course they want to present things dramatically cause it sells SUVs and Coke. I used to know someone who worked as a meteorologist, he was always agonised over how to report the weather predictions: the CBC would always tone them down in order to prevent panic, and the local TV stations would always play up any potential drama in order to keep people checking back.

[snousle.livejournal.com]

I think the fact that you were worried about the house price says that, whether the causes were "real" or not (I don't even know what real means in this context), there was the potential there for catastrophe.

There is always potential for catastrophe. Every day, in every realm. However, two years ago when people were urging me to sell our house and rent, I looked at the local economic fundamentals (not to mention Google's growth - my workplace was literally engulfed by their campus) and decided our position was secure. And I was right, at least for the relevant time period. If anything, we probably sold in too much haste, but we were MUCH more interested in eliminating downside risk than in lining our pockets with cash. If I'd been interested in maximizing our expected return instead, we'd probably still own the place.

However, things like stocks, houses, et cetra do not represent primary productivity and I would argue that they are not part of the changes to the business cycle described by the great moderation. And of course, the moderation could end overnight, but nobody can predict that or even know for sure if it's ended already, not for a few years anyway.

[bitterlawngnome.livejournal.com]

but as you've pointed out, people seem hell-bent on having a recession goddamit, and so don't you think they will get one?

[snousle.livejournal.com]

Eventually.

[bitterlawngnome.livejournal.com]

PS I'll dig up the poverty stats later when I have more time. UN and IMF, IIRC.

[snousle.livejournal.com]

OK, to be clear: I already know the world situation sucks, and is about to get very bad due to the recent commodities price increase. The Great Moderation is mostly a US/UK phenomenon, and my discussion is largely restricted to the US.

I do wonder, though, if in evaluating the US economy, Americans understand how difficult things are in the rest of the world even compared to the absolute worst-case scenarios here. That's a whole 'nother issue.

[bitterlawngnome.livejournal.com]

OK ok I was talking at cross purposes then sorry.