Imagine you can choose between living in two kinds of societies:
Dynamic world prone to wild swings and big crashes, but ultimately more growth in the long run
Safe and stable world with greater consistency, less volatility, and much lower risk of catastrophe
You might think that Americans and Europeans effectively decided to move from option 1 to option 2 between the late 19th and mid-20th centuries. Depending on your politics, you might attribute this to the stultification of modernity, or the triumph of the enlightened welfare state.
Regardless, you would be wrong.
The growth of government as a service provider and guarantor of financial security — backed by fiat money — has actually coincided with faster trend growth and greatervariance around that trend line. Moreover, the likelihood of particularly bad events has increased since the escape from the “golden fetters”.
Christina Romer, who among other things was a former economics advisor to Barack Obama, made her career discovering these surprising findings in US data. More than thirty years ago she found that “the stabilization of the unemployment rate between the pre-1930 and post-1948 eras is an artifact of improvements in data collection procedures” and that “business cycles before and after the Great Depression were approximately equally severe”.
In 1999, shortly before what would prove to be one of the most unpleasantly volatile recent periods for advanced economies, Romer presented an updated version of her findings, concluding that business cycles had roughly the same amplitude both before WWI and after WWII. Volatility was slightly lower in the modern period:
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