Welcome to ‘the Great Moderation’, Gerard Baker says:
Almost unnoticed, most of the industrialised world, especially the Anglo-Saxon part of it, has enjoyed a period of unprecedented economic stability.Recessions were once as frequent and as regular as World Cups or general elections. Now, like hurricanes in Hereford, they hardly happen. The classic business cycle has worked for centuries in a simple, recognisable way. As an economy grows, inflation accelerates. Interest rates then rise, cutting borrowing and investment. That causes production to decline, pushing up unemployment and producing a recession. Between 1950 and 1982 the US had seven recessions, one every 4.6 years. The UK had the same number and frequency. In between those recessions, inflation rose, reaching a higher peak in each cycle.
But something historic has happened in the past quarter of a century. The business cycle has not been abolished, but in the US and the UK, it has been stretched, to improbably great lengths. In the process, the wild fluctuations of employment, output, inflation and interest rates have been firmly damped. The peaks of inflation have been lower, and the troughs of output shallower.
As Gordon Brown constantly reminds us, the UK has not had a traditional recession for 15 years. Since the bottom of the slump of the early 1980s there has been only one recession in the past quarter of a century. The US did have a recession relatively recently, but a very short and shallow one; the previous one, in the early 1990s, was similar.
Economists have coined a term for this remarkable period of stability. Taking their cue from the Great Depression of the 1930s and the Great Inflation of the 1970s and 1980s, they have called the current era the Great Moderation.