Boomers, You're Responsible for the Great Moderation, Too

There was a glorious time between the mid-1980s and 2007 when inflation was low, economies boomed, and recessions were short and infrequent. In general, the business cycle -- an economics term that refers to the cycle of growth, contraction, and recovery that's a feature of every normal economy -- was subdued. When the economy slowed, it didn't slow for long.

Economists have wracked their brains trying to explain this period of time. Some attribute it to the rise of China and India, which fed the world with low-cost goods. Others say it was Alan Greenspan's skilled manipulation of interest rates. Others think it was just blind luck. Now, two economists at the Minneapolis Federal Reserve say we have baby boomers to thank.* In their own words:

We find that demographic change accounts for roughly one fifth to one third of the moderation experienced in the U.S. Clearly, demographic change is not the sole factor responsible for this episode; nevertheless, demographic change constitutes a common factor relevant for understanding the evolution of business cycle volatility — not only in the U.S., but also in other G7 countries — over the past four decades.

In other words, age profiles had a lot to do with this long period of low volatility. The authors point out that young people are extremely susceptible to business cycle fluctuations. When the economy turns south, they lose their jobs faster than everyone else, since they're seen as inexperienced and often transitory labor. Middle-aged careerists are less expendable, both because of their social situation (families to take care of, mortgages to pay) and their on-the-job experience, which is more highly valued in a soft economy.

If the authors' theory is right, then economies with lots of young workers would be more volatile than ones with lots of middle-aged workers. And that, they find, seems to be exactly the case.

Business cycle volatility peaks in the U.S. in 1978. This year coincides with the peak in the 15 - 29 year old labor force share at 38.5%. Cyclical volatility then falls rapidly during the 1980s, coinciding with a fall in the share of the young in the labor force as baby boomers enter their 40s and 50s. By 1999, the 15 - 29 year old share was only 27.1%, representing a level reduction of 11.4% from 1978.

The economists, Nir Jaimovich and Henry Siu, also look at other G7 countries, and find that the same basic pattern holds: After the youth bulge moves into middle-age, economies stabilize.

Of course, one interesting component of their research, which they don't dwell on at length, is that seniors also exhibit volatile employment -- presumably because both at the beginning and end of life, we're viewed as impermanent workers with little to lose if we get canned. In the past, this hasn't mattered much to the economy at large, because seniors have never made up a big enough chunk of society to really influence macroeconomic trends (at least not in the U.S.). But as the boomers age and work longer to afford retirement, might we see a Great Immoderation? If the last year and a half is any indication, we may have a rocky road ahead of us.