Nav: Home

Postwar economic policies fueled prosperity decades later, UT Dallas study finds

February 22, 2017

Economists call it the Great Moderation: the long stretch of low inflation and steady growth in the United States and seven other developed nations from the mid-1980s until the recession hit in 2007.

These nations actually experienced greater eras of economic stability during the 1920s and after World War II, according to a new study by an economist at The University of Texas at Dallas. The research challenges accepted notions about the 1950s postwar economy and argues that policies from that era laid a foundation that continues to protect the economy from volatility in inflation and gross domestic product.

"Economists tend to reserve the qualifier 'great' only for the most important events -- events that seem unprecedented in their magnitude or overall societal effect," said Dr. Victor Valcarcel, associate professor of economics in the School of Economic, Political and Policy Sciences. "But we found that, while the 1980s Great Moderation was indeed impressive in terms of stability gains, it pales in comparison to greater moderations in inflation in the 1920s, and in both inflation and output growth in the 1950s and 1960s."

The study, "What's so great about the Great Moderation?" is available online and in an upcoming edition of the Journal of Macroeconomics. Valcarcel and co-author Dr. John Keating of the University of Kansas coined the terms "Postwar Moderation" and "Roaring '20s Inflation Moderation" to describe those eras.

The research puts the Great Moderation in a broader historical context by analyzing data from 1869 to 2012. Few studies have examined macroeconomic volatility in the United States and other developed nations before World War II, Valcarcel said. The other nations in the study included Australia, Canada, Denmark, Finland, Italy, Sweden and the United Kingdom.

The study disputes the idea that the period of economic stability after World War II was simply a return to normalcy after war. Valcarcel argues that policy changes during that time fueled a postwar moderation and likely had a compounding effect on the gains made during the Great Moderation.

Important policy shifts included fixed exchange rates; the Employment Act of 1946, which charged the government with the responsibility of economic stability and high employment; and the Federal Reserve Accord of 1951, which gave the Federal Reserve independence from the U.S. Department of Treasury.

The study makes the case that these policies prevented conditions from being even worse during the recession that began in 2007.

"This is important information for policymakers because it shows that forward-thinking economic policies that take the long view may yield more lasting benefits than policy measures targeted to address short-term concerns," Valcarcel said.

The protective effect of the postwar policies highlighted in the study gives reason for optimism about the future economy, he said.

"There was an understanding when the Great Moderation was underway in the 1990s that we had a 'new normal,' that we'd never get the uncertainty of the 1970s back. That certainly went to pieces in the 2007 recession," Valcarcel said. "After the recession, there has been concern about whether the stability gains of the Great Moderation are over.

"Whether this last major disturbance in the global economy represents a temporary interruption or the death of stability gains associated with the Great Moderation, the stability gains achieved with the Postwar Moderation are still having a positive impact on the global economy," Valcarcel said.
-end-


University of Texas at Dallas

Related Recession Articles:

Study: Firms that owed more also laid off more workers during the 2007-2009 recession
The debt levels of large companies just before the Great Recession of 2007-2009 are strongly linked to local unemployment spikes during that time, a novel study co-authored by an MIT professor finds -- adding another dimension to our picture of the recent economic crisis.
Postwar economic policies fueled prosperity decades later, UT Dallas study finds
New research by an economist at The University of Texas at Dallas challenges accepted notions about the 1950s postwar economy and argues that policies from that era laid a foundation that continues to protect the economy from volatility in inflation and gross domestic product.
Negative health impact of economic recession unevenly distributed among groups in Spain
A study carried out in Andalusia, Southern Spain, following the 2007/2008 economic recession detected increasing inequalities in male mortality rates.
Growth in SNAP retailers followed enrollment spike during recession
Increased enrollment in the Supplemental Nutrition Assistance Program in Georgia contributed to the growth of grocery retailers at all levels from 2007 to 2014.
Great Recession's other legacy: Inconsistent work hours
A new study by researchers at the University of California-Davis, finds that an unpredictable work week is the norm for growing numbers of low-wage workers -- nearly 40 percent of whom worked variable hours for at least one four-month period after the start of the 2007-09 Great Recession.
Penn study links recession recovery, increase in commercial truck fatalities
New findings by grad student Monica He of the University of Pennsylvania reveal unexpected health consequences of economic recovery on fatalities involving large, commercial vehicles.
The rise of intimate partner violence during the Great Recession
Financial strain has long been one of the leading causes of family discord, but a recent study suggests that simply living through major economic recessions increases a mother's chance of suffering from domestic violence.
How the Great Recession weighed on children
Johns Hopkins Bloomberg School of Public Health researchers have found that increases in unemployment in California during the Great Recession were associated with an increased risk for weight gain among the state's 1.7 million public school students, suggesting that economic troubles could have long-term health consequences for children.
Paper: Young workers hit hardest by slow hiring during recessions
When hiring slows during recessions, the brunt of job losses is borne by job-seekers in their 20s and early 30s, according to a new paper by Eliza Forsythe, a professor of labor and employment relations and of economics at Illinois.
During Great Recession employees drank less on the job, but more afterwards
Periods of economic uncertainty tend to influence drinking problems among people who lose their jobs, as some turn to alcohol due to stress or because they have more free time and fewer responsibilities.

Related Recession Reading:

Best Science Podcasts 2019

We have hand picked the best science podcasts for 2019. Sit back and enjoy new science podcasts updated daily from your favorite science news services and scientists.
Now Playing: TED Radio Hour

Jumpstarting Creativity
Our greatest breakthroughs and triumphs have one thing in common: creativity. But how do you ignite it? And how do you rekindle it? This hour, TED speakers explore ideas on jumpstarting creativity. Guests include economist Tim Harford, producer Helen Marriage, artificial intelligence researcher Steve Engels, and behavioral scientist Marily Oppezzo.
Now Playing: Science for the People

#524 The Human Network
What does a network of humans look like and how does it work? How does information spread? How do decisions and opinions spread? What gets distorted as it moves through the network and why? This week we dig into the ins and outs of human networks with Matthew Jackson, Professor of Economics at Stanford University and author of the book "The Human Network: How Your Social Position Determines Your Power, Beliefs, and Behaviours".