DeLong: The case for the Fed, now and into the future

It is certainly possible that the relative macroeconomic calm of what we used to call the "Great Moderation" from 1985-2005 played a material role in setting the stage for our current volatility and distress. But in the larger sweep of history, even our current volatility and distress has been quite effectively handled and managed--at least compared to what went on back before the U.S. government and the Federal Reserve took on the mission to attempt and handle and manage the macroeconomy.

We can see this if we take a look back and ask the question: what does an economy without effective macroeconomic regulation look like?

We do not have all that many examples. Britain's Bank of England started regulating the macroeconomy in response to the industrial business cycle back in 1825. The Bank of France was not far behind. Almost as soon as a country had a capital-intensive industrial sector capable of generating a modern business cycle, it had a central bank to stabilize its macroeconomy.

The U.S. was an exception. It lost its proto-central bank to Andrew Jackson in the 1830s. It did not acquire a central bank until 1913--and the central bank had no clue what to do in a recession after the death of Benjamin Strong in 1928. The pre-World War II U.S. was as close to an economy without effective macroeconomic regulation as we have--and even there we have occasional monetary and banking policy conducted by the pickup central banks that were the House of Morgan in 1907 and the Belmont-Morgan syndicate in 1895. It was the passage of the Employment Act of 1946 that marked the start of systematic stabilization policy in the United States.

And, at least from the perspective of the metric that is the non-farm unemployment rate--the agricultural sector does not have an industrial business cycle, after all--there is no evidence that macroeconomic management has not been vastly better than the alternative. [Source]