In times of a shaky global economy it could be good to have some perspectives on how the swings in the economy have developed over time. And is has become better!
Some of you probably remember the 1970s when we had the oil crisis and the drastic ups and downs in the world economy. We learned from Keynes that such swings are natural part of the economic life. But, as shown by the Economist, something has happened over the last 20 years. In most of the developed world fluctuations in economic growth have fallen by around half since the early 1980s. See graph below.
This in turn has cut off the worst periods of high unemployment and it has beefed up growth. In short, the economies are more stable nowadays which is a great thing.
So what is the reason for this change? The skeptical view is that improved stability has no cause: it is mostly down to luck. Economic shocks have by chance been less powerful. The economy is no better at taking a hit; it is just that since the two oil-supply shocks of the 1970s the punches have not been so hard.
But a study published last year (by Cecchetti, Flores-Lagunes & Krause) shows that economies have become far better at absorbing shocks. You may guess that better and more independent central banks are the key reason. Or expansion and innovation in credit markets. Yes, they have both contributed. But surprisingly the big contributor to reduced volatility comes from something as workaday as supply-chain management.
Thanks to improvements in technology, firms now have timelier and better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions. This makes huge stocks unnecessary and minimizes the lurches in inventories that were once so destabilizing. More than half the improvement in the stability of economic growth is accounted for by diminished inventory cycles.
