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April 06, 2005



Yup, I suppose that the US economy might have been pretty stable in 1930-1938, with the blessings of Hoover's and FDR's hamfistedness upon them? Or was the Fed to blame? Whatever: until weapons orders from the UK and France perked them up, they were pretty stable at a low level of activity, weren't they?


Actually, economic output was extremely volatile in the 1930s-- the depression consisted of two very distinct recessions with a major recovery between them.

But, if you read the history the original reason for creating the Fed was to create economic stability. There was not a word about inflation in the original legislation or debate. The monetary system before the fed tended to be very pro-cyclical and the fed did not really learn how to implement a counter cyclical monetary policy until after the 1930s.


very interesting post, and I buy your conclusion about GB. Couple of points strike me though :

- the average costs of a macroeconomic dip are small maybe, but the fact is they are concentrated and can have profound effects on individuals. And this means that we have to look at the adequacy of social insurance... both income replacement and help in finding work again. there are plenty of reasons to believe markets in social insurance fail; so policy matters, both macroeconomic and microeconomic

- if a dip is big enough it can have political effects .... the rise of the nazis in germany was on the back not only of the war defeat, but also the lousy economy. and the nazis early grip on power was cemented by the economic recovery that took place when they were in power. So the economy and society are inter-twined, and the effects of a recession are not necessarily always linear.


I would like stable economic growth of 5pc a year, and stable decreases of taxation as a per cent of national GDP.
Maybe rjw nails it: stable economies can mean a stable populace and a stable government, whereas even a small blip in the economy can bring a political change (as we all expected in 1992, but prolly Labourites were so confident of the win, those unemployed spongers forgot to go to the Polling stations before spending their days boozing and celebrating the "victory" - much like Bart's campaign in The Simpsons, which Martin then won by a single vote, as only one vote was cast.)
So this stability Brown talks about does two things:
1 - highlights the greater instability under the Conservatives (but perhaps hiding better overall longterm growth)
2 - cements Labour's position in government


The risk reduction achievable through insurance is limited by the riskiness of the economy as a whole. So, if we have efficient insurance markets that people use, macro-economic stability would be the proper goal as any individual instability could be insured against.

Imagine 10 people on an island fishing. If they all fish in the same place then they all catch the same number of fish, but the number each day could vary a lot. There would be no opportunity to insure. Alternatively, they could all fish in different places and catch wildly different numbers of fish, but the average number of fish caught would be more stable. Without insurance, this would be a less volatile economy with the same individual volatility (**). They could also rationally agree to pool all their catches and divide them equally, now they have lower individual vol than before.

(**) further complication could lead to an economy with lower overall vol, higher individual vol, higher average value, and lower individual vol after insurance.


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