Why is the slowdown not so bad

Via Mark Thoma, the highly intelligent Tim Duy offers an explanation.  Here’s one small bit:

The impact of the consumer slowdown is partially offshored, a point which
I think deserves greater attention. This shifts job destruction to an overseas
producer.

Most important, in Duy’s view, are the ongoing injections of liquidity from abroad.  And here’s a new NBER paper on the sources of the great moderation; the abstract reads:

The remarkable decline in macroeconomic volatility experienced by the
U.S. economy since the mid-80s (the so-called Great Moderation) has
been accompanied by large changes in the patterns of comovements among
output, hours and labor productivity. Those changes are reflected in
both conditional and unconditional second moments as well as in the
impulse responses to identified shocks. Among other changes, our
findings point to (i) an increase in the volatility of hours relative
to output, (ii) a shrinking contribution of non-technology shocks to
output volatility, and (iii) a change in the cyclical response of labor
productivity to those shocks. That evidence suggests a more complex
picture than that associated with "good luck" explanations of the Great
Moderation.

Other work suggests that superior inventory policies, and information technology, have smoothed out slowdowns.  It might also help that wages have lagged productivity for some time down; negative shocks might lead to less unemployment than otherwise would be the case.  Here’s a look at the international evidence, which shows a moderation across many countries and points a finger at monetary policy and inventories.  Jim Hamilton looks at oil and the great moderation; read here too.  Circa Jan. 2007, Mark Thoma thought financial innovation was not the answer.

I don’t think it is crazy to cite "globalization" as the best single-word, seat of the pants response.  But for any longer treatment, the answer is quite complex.

Comments

You're the economist and I'm not, but I wonder why you quoted Tim Duy's number 2 explanation, which leads to "'globalization' as the best...response" and not his third and 'perhaps most important':

3. Perhaps most importantly, however, is the massive liquidity injections from the rest of the world, or what Brad Setser calls “the quiet bailout.† In the first half of this, global central banks accumulated $283.5 billion of Treasuries and Agencies, something around $1,000 per capita.

To me this would suggest "foreign government intervention" as the best three-word, seat of the pants response, no?


The impact of the consumer slowdown is partially offshored, a point which I think deserves greater attention. This shifts job destruction to an overseas producer.

By the same token the impact of tax rebate is partially offshored when one spends it at Wal-Mart loading up on Chinese junk.

I think part of the issue here is inflation. Economists concentrate on core inflation, which excludes energy and food. Real people spend a lot of money on food and energy. These prices have been going up for quite a while now. Rich people on TV are not affected as much by these costs.

Steve

"Economists concentrate on core inflation, which excludes energy and food."

What leads you to believe that economists concentrate on core inflation? That statement seems bizarre.

Why is everyone ignoring the role of Government transfer payments? Already by the late 1950's economists were talking about the role of "automatic stabilizers" in moderating business cycles. They haven't declined since then. Take a look at the BEA personal income data. Government transfer payments have gone from 5.8% of personal income in 1959 to 14.6% in 2007. Wage income may decline in recessions but GTP continue on their upwards trajectory. That seems like a better explanation for the Great Moderation than the genius of central bankers, which seems less impressive than it used to.

"By the same token the impact of tax rebate is partially offshored when one spends it at Wal-Mart loading up on Chinese junk."

True, which is why increasing spending on infrastructure would be a better way to stimulate the economy.

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