The Great Moderation
As part of their effort to harness the power of the market, they have plowed tremendous energy — and money — into understanding risk. Their mathematical equations have let them predict the odds of bad outcomes with growing precision. Their financial inventions have let them shape, share and limit their risk with ever-greater sophistication.
"All of finance — not just insurance, but banking, venture capital, even the stock and bond markets that are so often held out as the very models of what a competitive economy should be — is about managing risk," said Yale economist and financial theorist Robert J. Shiller.
Risk management tools help health insurers tailor coverage so that they avoid people apt to file lots of claims — or charge them more. Credit card issuers have figured out how to target those most likely to carry large balances and yet still manage to pay. Consultants devise variable pay schemes and flexible work schedules that let companies increase output while minimizing their risk of being stuck with unneeded employees.
In these ways, the economy has been reshaped much as government and business leaders envisioned 25 years ago, and with the very result they sought.
After bouts of instability in the 1970s and early '80s, the economy as a whole has begun operating in a smoother, less calamity-prone fashion. The amount that the gross domestic product — a measure of all the goods and services produced in the U.S. — jumps around from quarter to quarter has been cut in half since 1984.
Scholars have dubbed this decline in economic volatility "The Great Moderation." They have praised the trend for significantly reducing the risks that businesses face in making investments and that policymakers must juggle in guiding growth. Working families have also reaped substantial benefits, with inflation held mostly in check for more than 20 years.
And yet — with the new tools of high finance largely unavailable to them — there has been a huge downside for families as well.
Although the overall economy has become steadier — settling into a pattern of long swells of growth followed by relatively gentle dips — the incomes of working people have been beset by ever-larger fluctuations. Looked at in this way, "we haven't reduced economic risks" at all, said Harvard economist Martin L. Weitzman. "We've simply redistributed them from the economy as a whole to individual households."
Among those households is Ron Burtless'.
Burtless arrived at Bethlehem Steel's sprawling Burns Harbor, Ind., plant at the southern tip of Lake Michigan on a cold day in March 1975. The steel industry was near its zenith, and jobs at the factory looked as durable as the heavy metal sheets that are its specialty.
So confident were industry executives about steel's permanence on the American scene that they had recently signed a landmark labor pact with the United Steelworkers union. What the industry got from the Experimental Negotiating Agreement was a no-strike pledge. What it gave in return was perhaps the richest package of wages and benefits in the history of the industrialized world.
The accord promised an indefinite string of 3% raises. In an era when oil embargoes and Soviet grain deals had sent prices flying, it provided complete protection against inflation above and beyond the 3%. It set the stage for improvements in health, dental and eye-care coverage; extra unemployment and workers' compensation in case of layoff or injury; and even employer-paid "sabbaticals" for plant veterans.
In short order, the agreement helped Burtless more than double his income from $13,500 in the mid-1970s to $32,000-plus in the early 1980s. The money gave him the wherewithal to buy a blue three-bedroom ranch house near the plant and an American Motors Javelin with V-8 engine and dual exhausts.
Just as important, the labor pact inspired the young electrician to set a long-term goal — to hang on until March 2005, when he would hit the 30-year mark with Bethlehem and could quit with an ample pension and health insurance for life.
At that point, Burtless would be only 50 years old, and he could pick up, move or start a new career at almost no risk to his economic security. "It was going to be my freedom," he said.
But in 1982, Big Steel buckled. A combination of recession, foreign competition and a tripling of compensation costs clobbered the industry. In short order, steel producers ditched the groundbreaking labor accord and Bethlehem cut its workforce from nearly 80,000 to 34,000. Steel sabbaticals were out.