Taming Economic Volatility
January 25, 2001
Economists say there is considerable evidence something wonderful began happening to the U.S. economy beginning in 1984. Since then it has become much less volatile. It has stabilized and may be able, permanently, to avoid the wild swings characteristic of pre-1984 patterns.
In the December 2000 American Economic Review, Margaret M. McConnell of the Federal Reserve Bank of New York and Gabriel Perez Quiros of the European Central Bank pinpoint the first quarter of 1984 as the period when "the break" with the old volatile pattern began.
Here is an explanation of what happened:
- Private sector changes in organization and technology have calmed the durable goods sector of the economy -- which used to be its highly volatile component.
- Durable-goods makers adopted techniques of lean manufacturing and just-in-time logistics.
- Producers now have more accurate and up-to-the-minute information about what's selling and their plants are able to shift their product mix more quickly -- thereby avoiding the build up of high inventories.
- It was the backlog of inventories when an economic downturn occurred that led to sudden and sharp cuts in production -- and the massive layoffs that only further aggravated the economic decline.
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