The Great Moderation

It has been 20 years since Alan Greenspan became chairman of America’s Federal Reserve Bank. The years since then have seen the fastest global average income growth rate of any generation, as well as remarkably few outbreaks of mass unemployment-causing deflation or wealth-destroying inflation. Only Japan’s lost decade-and-a-half and the hardships of the transition from communism count as true macroeconomic catastrophes of a magnitude that was depressingly common in earlier decades.

This “great moderation” was not anticipated when Alan Greenspan took office. America’s fiscal policy was then thoroughly deranged – much more so than it is now.

India appeared mired in stagnation. China was growing, but median living standards were not clearly in excess of those of China’s so-called “golden years” of the early 1950’s, after land redistribution and before forced collectivization turned the peasantry into serfs. European unemployment had just taken another large upward leap, and the “socialist” countries were so incompatible with rational economic development that their political systems would collapse within two years. Latin America was stuck in its own lost decade after the debt crisis at the start of the 1980’s.

Of course, the years since 1987 have not been without big macroeconomic shocks. America’s stock market plummeted for technical reasons in the fall of that year. Saddam Hussein’s invasion of Kuwait in 1991 shocked the world oil market. Europe's fixed exchange rate mechanism collapsed in 1992. The rest of the decade was punctuated by the Mexican peso crisis of 1994, the East Asian crisis of 1997-98, and troubles in Brazil, Argentina, Turkey, and elsewhere, and the new millennium began with the collapse of the dot-com bubble in 2000 and the economic fallout from the September 11, 2001, terrorist attacks.