Facts and Factors in the Recent Evolution of Business Cycles in the United States

A reexamination of data indicates a great diversity of cyclical experience in both the distant and recent history, but also a distinct moderation of the business cycle in the postwar era (shorter and milder contractions). This is consistent with long and widely held views, but contrary to some recent claims. A list of possible sources of the moderation is presented, and several hypotheses are examined. There is evidence that some structural shifts (in employment, not in the consumption-investment mix) had a net stabilizing influence. Institutional changes helped mainly by improving the functioning of the financial system. Automatic fiscal stabilizers played an important role. It is difficult to grade the record of macroeconomic policies because it is very mixed, and the active and passive elements in policy are both important and intermingled. Historical assessments and statistical tests suggest that this is true for both fiscal and monetary actions, which were often mistimed, misestimated, or mismatched. Still, some net stabilization was probably achieved. Also, the moderation of the business cycle itself induced some positive changes in expectations and behavior of private economic agents. Most of these factors worked better in the first than in the second half of the postwar period, when cyclical instability increased along with rises in the levels and variability of inflation and interest rates.