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. Last Updated: 07/27/2016

Study: U.S. Economic Stability Just Luck

WASHINGTON -- Many have praised the brilliance of Alan Greenspan and his predecessor at the Federal Reserve helm for blunting the most savage swings of the U.S. business cycle. But there's a good chance most of what tamed the booms and tempered the busts was plain old dumb luck.

That's the finding of a paper by three researchers at the central bank's Washington-based Board of Governors who examined what might lie behind a marked decline in the volatility of U.S. economic growth since the mid-1980s.

Many analysts credit the skillful economic steering of Greenspan and inflation-slaying Paul Volcker, who preceded him as Fed chairman, for the improved performance.

Others have said the smoother pattern of growth in U.S. gross domestic product reflects better business practices, particularly the "just-in-time" speedy inventory management that new technologies made possible.

But researchers Shaghil Ahmed, Andrew Levin and Beth Anne Wilson say the apparent flattening of the peaks and valleys in the boom-bust cycle -- and the little fits and starts in between -- seems to be mostly down to chance.

"Although better practices and better monetary policies have played some role in explaining the decline of U.S. output volatility in the past 10 to 15 years, good luck is probably the leading explanation," they said in a paper recently posted on the Fed's web site.

In the U.S. boom years of the 1990s, some had ventured so far as to proclaim the business cycle dead. How alive it is has since become abundantly and painfully clear -- just ask the 1.6 million Americans who lost their jobs last year.

Still, the fact that volatility has been lower is not in dispute.

From 1960 through 1983, annual rates of real GDP growth gyrated wildly quarter to quarter, with the annual rate dipping as low as a contraction of 8 percent and spiking as high as plus 15 percent -- a 23 percentage point swing.

Since then, growth from one quarter to the next has followed a much more even path, with changes in GDP oscillating in a relatively contained 11-point range. What's more, there have been only two recessions, both brief and shallow by historical standards, with the most recent appearing to have ended early this year.

The Fed researchers determined that the volatility of growth had been cut in half. But why?

If it had been mostly due to better monetary policy, the downward shift should be most evident in the tempering of business cycle peaks and troughs, while better inventory management would likely smooth growth within a cycle.

But the researchers found volatility reduced in equal proportion whether gauging it over the course of full cycles, or examining the shorter-run changes in GDP in between.

It seemed unlikely that better policy and business practices would have such an equal impact, and the researchers reasoned that volatility had been reduced because of fewer and smaller shocks to the economy.

In other words, luck was due the credit, a finding that withstood their further econometric testing.