The End of the Great Moderation

Robert B. Reich
Marketplace, July 15, 2008

What economists have called "The Great Moderation" -- a period when the
business cycle evened out, and neither inflation nor recession posed
much of a threat -- began in the mid-1980s, and now appears to be over. It
was good when it lasted. But it led the nation to think we didn't need
much by way of social insurance.

No one knows for sure what caused the Great Moderation. Some credited
increased sophistication of financial markets or the wisdom of the Federal
Reserve Board. Hindsight suggests it was more luck than anything else.

Well, folks, it turns out the great moderation was something of a fluke,
and now tens of millions of Americans are in trouble with no safety net
to help them.

That's because the apparent end of the boom and bust cycles led us to
assume the economy would no longer impose huge, unexpected, and
arbitrary losses on large numbers of Americans. So we basically got rid
of the safety nets.

We abolished welfare, let unemployment insurance wither, and paid scant
attention when corporations eliminated defined-benefit pensions and cut
health insurance benefits. We even stopped worrying about the safety of
small investors, and allowed federal deposit insurance to cover a smaller
and smaller percentage of Americans' savings.

But now we have to rethink safety nets.

Today's new nets are being spread for the wrong people. The giants of Wall
Street along with Fannie and Freddie are getting bailed out but there's
still no relief in sight for most homeowners who can't pay their
mortgages. Corporations that don't deliver on their pension obligations
are helped but there's nothing for retirees and small investors whose
savings are drying up because of Wall Street's decline. Banks are getting
bailed out but depositors are finding themselves without the savings they
thought they had stashed away.

Yet I have to believe the end of the Great Moderation will eventually
result in a broader safety net. That new netting is unlikely to look like
the old forms of social insurance designed mainly in the 1930s and 1940s,
when large numbers of Americans worked on farms or in factories, and put
their money in the local Savings and Loan.

The new forms of social insurance are likely to come in the form of
universal health insurance, earnings insurance, and savings accounts in
which the dollars you put away are supplemented by government dollars.

There may be other innovations. But one thing is clear. The very rich and
the biggest corporations don't need social insurance. Now that the booms
and busts are back, the rest of us do.