The costs of stability

One of Gordon Brown's favourite words is "stability." As he said the other day: "We have steered a course of stability through difficult times and so my message is: stability is our watchword and will remain so."
However, this new paper suggests that stability might be positively damaging. It estimates that, within G7 countries, there's a negative relationship between stability and long-run growth. "Stability", then, can make us poorer in the long-run.
One reason for this is that short-term volatility means there'll be lots of temporary booms and slumps. In the booms, firms and workers might learn new productive tricks in an effort to meet demand. And if they don't forget these tricks in the downturns, the stock of knowledge will be higher as a result of boom and slump than it will if growth is stable. Productivity - and hence output - will then be higher on average in the long-run.
This is not an isolated finding; as I showed in my book, the empirical evidence that stability is good for growth has long been highly doubtful.
Which raises the question. If stability doesn't make us richer - and might even make us poorer - why is Brown so keen on it?
It can't be because stability reduces individuals' risk of unemployment. Macroeconomic stability is entirely consistent with huge fluctuations in individuals' fortunes, if these are negatively correlated. The solution to individual uncertainty lies in better insurance mechanisms - either markets or the welfare state - not macroeconomic management.
Instead, my hunch is that Brown's talk of stability is a managerialist trick. It's an effort to convince us - and perhaps himself - that he is in charge and on top of things. But the thing is, he might not be. There's some evidence - albeit controversial - that the UK's great economic stability is due to just luck (pdf).

Comments

[Gracchi]

I have always suspected Brown on stability. Partly because I suspect politicians who think that they can control so much- especially when the UK economy is so exposed to global trends given the large place the City plays in it. I like your point about boom and bust- there might be something in it- in a sense nationalisation say of the coal industry in the 40s was a forced stability that resulted in greater pain later because the economy's stability meant it didn't respond to the falling demand for coal and rising production from other causes. No doubt you could find other examples- but it does strike me that the more stable you are, the less responsive you are to what's going on in the world.

[reason]

This is an interesting theory, although I thought the evidence was not convincing one way or the other. You didn't mention the advantage of recessions either - that startups can find cheap quality resources that would otherwise be unaffordable for them (being horded by the massive corporations). The processes of innovation are I think not well understood.

[reason]

On the other hand, stability is important for raising children, and the society needs to do that well in order to be successful long term.

[Bruce]

Most of us are risk-averse and happy to trade potential long-term wealth for medium-term stability. Brown likes stability because it is a vote winner.

[Mark Wadsworth]

Broadly agreed.

There is an better indicator for true health of economy - if house prices are rising faster than wages, it is an ominous sign and a portent of doom. These 'dashes for growth' always lead to a rise in house prices because there's not enough productive stuff to invest in (be that training, education, setting up a business or buying shares) and that leads to asset/credit bubble, and when those burst we end up worse than we would have been without it.

And seeing as house prices were at an all-time low (relative to wages) back in the mid-1990s and are now at an all time high, well, we are truly buggered for the next few years at least, the 'Brown Bubble' will go rank alongside the Tulip bulb and South Sea bubbles in the annals of economic madness.

[figurewizard]

The stability that Gordon Brown has consistently bellowed from the rooftops was always a sham. Between 2001 and 2007 average net disposable income rose by 29%, while house prices rose by 90%. Borrowing followed suit and by the end of 2007 UK personal debt stood at £1.35 trillion; 101% of GDP. With a debt ratio like that on your desk a desperate new policy is called for and Alistair Darling and the Bank of England are already getting their retaliation in first. It's called inflation and is now seen as the only way the real value of personal debt can be reduced in time for the economy to lurch forward a little in time for the next election. Hence the cut in rates which has acheived nothing other than to devalue Sterling on the one hand and shore up the banking sector's margins on the other.