Many nations in the developed world, led by the US, have decreased in the volatility of their economies’ performances over the last two decades. A leading cause has been supply chain management. The Economist:

The most visible symptom of this smoother trajectory is in the jobs market. Since the mid-1980s, America’s unemployment rate has fluctuated far less than it did in earlier generations. Between 1961 and 1983, America’s annual unemployment rate varied from 3.5% to 9.7%. Since 1984, it has stayed within the tighter bounds of 4% to 7.5%.

Much of America’s good fortune has been repeated elsewhere. A study published last year by Stephen Cecchetti, of Brandeis University, Alfonso Flores-Lagunes, of the University of Arizona, and Stefan Krause, of Emory University, found that 16 out of 25 OECD economies, including Britain, Germany, Spain and Australia, had also seen a marked improvement in economic stability.

What lay behind that change?…The more likely explanation is that economies have become far better at absorbing shocks, because they are more flexible. There are many structural shifts that might have contributed to this, from globalisation to the decline of manufacturing in the rich world. The academic literature keeps returning to three: improvements in managing stocks of goods, the financial innovation that expanded credit markets, and wiser monetary policy.

For such a tiny part of GDP, the content of warehouses has had a surprisingly big effect on its volatility. When industries cut or add stocks according to demand, that adjustment magnifies the effect of the initial change in sales. Stock levels were once much larger relative to the size of the economy, so a small slip in demand could easily blow up into a recession. But thanks to improvements in technology, firms now have timelier and better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions. This makes huge stocks unnecessary

The other two leading factors contributing to lower volatility have been innovations in credit technology and better monetary management by central banks. Of course, the decrease in volatility has had the predictable result that households have become much more tolerant of leverage — a doubling in Britain and more than a 50% increase in the US:

Many of the elements that have contributed to lower economic volatility, such as the improvements in supply chain management and the greater flexibility of capital and labor markets, have themselves derived from the recent revolutions in information technology, including computing and the internet. If these represent one-time adjustments, however large, it will perhaps be seen in retrospect that the increased willingness to take on debt was unwise. We shall see.

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