WAS THE ECONOMY MORE STABLE DURING THE KEYNESIAN ERA THAN BEFORE THE DEPRESSION?

Through much of the Keynesian era, economists believed that the economy had become more stable, certainly in comparison with the Great Depression but also in comparison with the predepression era. Greater stability was the result, they believed, of changes in the economy’s structure (the relative decline of manufacturing and agriculture and the rise of services) and Keynesian fiscal policy. That view was certainly eroded by the Great Inflation, but many staunch Keynesian economists believed that at least in terms of real magnitudes, their policies had stabilized the economy.

Christina Romer (1986a, 1986b) challenged this view. She pointed out that the amount and reliability of raw data available in the postwar period on unemployment, GDP, and similar variables were much greater than what it had been earlier in the century. The reduction in the variability of the key macroeconomic indicators, she argued, was merely the result of having better estimates: The improvement was a “figment” of the data. To prove her point, Romer extended the prewar estimates forward in time. In other words, she estimated postwar unemployment, GDP, and so on, as if she had to make do with only the “bad” prewar raw data. An example of what she found can be seen in Table 28.2. The official estimates for 1948-1982 are shown on the second line, and Romer’s estimates are shown below them in parentheses. The key change is in the standard deviation of the unemployment rate. The conventional data shows a dramatic fall from 2.38 to 1.58 percent, indicating greater stability. Romer shows that if the prewar

Source: Computed from Romer 1986b, 3, 12.

Technique for estimating unemployment had been used in the postwar period, the fall would have been from 2.38 to 2.24 percent, indicating little improvement. Romer’s work has been challenged (Weir 1986), but it has made economists more cautious about their claims for modern policymaking.