Hamilton Place Strategies
www.hamiltonplacestrategies.com
The Macro Risk-Reward Tradeoff
How To Balance Stability And Growth
Findings:
If significantly
faster growth is
possible, growth
beats stability.
If only
incrementally faster
growth is possible
- and would bring
with it a disastrous
recession - stability
beats growth.
Even the impact
of another Great
Recession would be
mitigated if it came
with significantly
faster growth
during boom times.
Matt McDonald
Russ Grote
Andrew Van Duyn
JinAh Kim
The views expressed in this doc-
ument represent those of the
authors alone.
202-822-1205
THE economic trauma of the to the relative strength of
Great Recession sparked a the recovery, the policy
good deal of never again pendulum is also shifting
policy-making in Wash- toward boosting the rate of
ington. The public reacted economic and wage growth,
strongly to politically unpop- elevating concerns about
ular bailouts and an economy economic and financial
at the brink, and politicians stability.
responded with regulatory
crackdowns on risk-taking. This dynamic raises the
The result has been slow, obvious question: If we
but steady, growth. In fact, want to maximize economic
at 32 quarters, this is one growth, how long does slow-
of the longer expansions on and-steady growth need to
record, echoing last to make it
then-President a better policy
If we want to
Obamas 2012 choice than
reelection maximize economic boom-and-
campaign growth, how long bust?
slogan: an does slow-and-steady
economy built growth need to last Background
to last. to make it a better and approach
policy choice than
Now, it is Recent analysis
arguable boom-and-bust? by Blackrock
whether the shows that
pace of this while growth has been
recovery reflects a policy slower during this expansion
choice or is simply the if we adjust for the length
consequence of a debt crisis of the business cycle, this
and the slow recovery that recovery is in line with
follows, secular stagnation, previous cycles. In that
or demographic headwinds. sense, post-recession policy
But as public discontent choices have been a success.
shifts from the crisis itself The driving assumption in
Figure 1: Comparative Scenarios For Growth Policy
Quarters
Scenario
Of Growth
Average Of Last 5
24
Business Cycles
Last Business
24
Cycle (2000s)
Current Business
47
Cycle*
Current Growth
105
With Long Cycle
Prior Growth With
24
Great Recession
Note: All rates of growth/contraction are annualized; *Total length of current expansion assumes last quarter was 2/3
through the cycle, with a recession to follow that resembles the average of the last 5 business cycles.
Blackrocks analysis is that
we are about two-thirds of
the way through the expan-
sion, suggesting we will
avoid a recession for the next
four years.
To answer whether current
policy is the right trade-off,
we looked at net gains in
GDP over the current and
previous business cycles
on a per year basis. In our
analysis, we used GDP in
2009 dollars with peaks cycles.
and troughs as designated
by the National Bureau
of Economic Research to
indicate the bounds of the
business cycle. To compare
across business cycles, we
used measures of quarterly
net average growth and
Rate Of Quarters Of
Growth Contraction
3.9%
2.9%
2.1%
2.1%
3.9%
annualized net average
growth. Net average growth
should be thought of as the
growth that occurs during
the business cycle after you
Even if this recovery
lasts 100 years and is
followed by the mildest
recession in history, we
still will never reach the
net annualized growth
of those previous
factor in both the expansion
and the contraction.
With this approach, we
looked not only at the gains
during a period of expansion,
Rate Of Net
Contraction Growth
4 -2.3% 3.1%
6 -2.8% 1.7%
4 -2.3% 1.6%
4 -2.3% 1.9%
6 -2.8% 2.5%
but also netted out the
losses occurring during the
contraction following that
expansion. The basic policy
goal is to grow as fast as
possible, after accounting for
contractions.
What if significantly faster
growth is possible? Growth
beats stability.
Prior to the 21st century,
the U.S. economy grew at
a much faster rate. In fact,
over the past five business
cycles going back to the
late 1970s, net annualized
growth (accounting for
recessions) was just over 3
percent per year, with an
average expansion of about 6
years and less than a year of
Hamilton Place Strategies 2
Fig. 2: GDP Growth Has Been On Par With The 2000s Cycle, But Not An Average Of The Past
Five Cycles
GDP (Trillions Of 2009 Dollars) By Comparison Scenario,
2001 To Present
22
Predicted Growth, Current Rate
Predicted Growth, 2000 Rate
20 Predicted Growth, Average of Last 5 Cycles
Actual Growth
18

16

14
Lowest Point of 2017 Q2
Great Recession Present Day
12
2004

2014
2009

2019
2006

2016

2018
2001

2010
2011
2003

2013
2005
2002

2012

2015
2008

2020

2021
2007

2017
NBER, HPS Analysis

recession. Effectively, the lost growth What if incrementally

during the expansion faster growth is only
Meanwhile, our average swamps whatever benefits possible with a calamitous
annual growth in this may be gained by avoiding recession? Stability beats
recovery has been about 2.1 a recession for an extended growth.
percent, and the recovery has period of time. Therefore,
already gone about 8 years. The previous analysis does
If we assume a future reces- Effectively, the lost not take into account that
sion on the magnitude of the economy has changed a
growth during the great deal since the 1970s
the past five, occurring after
almost 12 years of growth, expansion swamps and 1980s. The average
the net annualized gains whatever benefits may annual growth during the
drop to just 1.6 percent. With be gained by avoiding previous five expansions was
the net growth rate of prior a recession for an 3.9 percent. In the 2000s,
business cycles higher than extended period of it was 2.9 percent, which
the absolute growth rate of is more in line with recent
time. growth rates. Therefore,
this cycles recovery, even
if this recovery lasts 100 we also compared the
years and is followed by the if policy is sacrificing faster current business cycle to the
mildest recession in history, growth for fewer recessions, previous cycle, asking the
we still will never reach the we are almost certainly same question. The challenge
net annualized growth of choosing a smaller economy. with the prior business cycle
those previous cycles. is that while the economy
may be more similar to
Hamilton Place Strategies 3
todays from a growth if it comes with another might suggest we are better
perspective, the recession Great Recession. Virtually off focusing on how to deal
was far beyond what we no expansion of any length with recessions rather than
would usually expect. can overcome the power of avoiding them and defi-
compounded growth. nitely implies we should be
If we compare slow and focused on policies that will
steady growth followed by To understand this further, encourage growth.
a moderate recession to lets take it to the extreme.
slightly faster growth and Say that the current expan- There are other implica-
a deep recession, we would sion lasts for 105 quarters, tions to the business cycle
prefer the slow and steady meaning the U.S. would ups-and-downs that we
approach. In surpass need to think about from a
this scenario, At our current growth Australia and policy perspective. A boom
we find that the Nether- period can enable labor
rate, even a record-
the policy lands for the mobility, career changes and
tradeoff is setting quarter-century longest period risk-taking that are helpful
worth it after expansion would not of growth on at an individual level. A big
40 quarters match the gains brought record. At crash can result in older
of growth at by robust growth and a our current workers permanently exiting
the current Great Recession every 6 growth the workforce, cutting their
average rate rate, even a careers short, while slow
years.
and a normal record-setting growth can stunt job pros-
recession to quarter-cen- pects and wages for younger
follow (i.e., not the Great tury expansion would not workers before they even
Recession). This combination match the gains brought by begin theirs.
of factors leads to the same robust growth and a Great
annualized net growth rate Recession every 6 years. This The trade-offs of growth and
as the last business cycle. is how powerful growth is for timing affect GDP, but more
Therefore, the expansion the economy. importantly,
needs to last eight more The point of public they affect
quarters for slow-and- Implications policy is not to create people. The
steady to beat slightly more point of public
the safest economy
growth with a big bust. Much of this policy is not
analysis hinges
possible, even if to create the
What if significantly faster on what we growth is slow ... safest economy
growth comes with deep expect for possible, even
recessions? Growth still the future of the American if growth is slow: the point
swamps stability. economy. If policy cannot is to create an economy
meaningfully combat that allows people to pursue
Policymakers would certainly demographic headwinds and their potential and create
be forgiven for guarding secular stagnation, avoiding a better life for themselves
against another Great Reces- recessions by decreasing and their family. Sometimes
sion at the expense of slower risk is worth it. However, if that means a safer economy,
growth. Yet, our analysis policy can jumpstart growth and sometimes that means
shows that if policymakers by injecting some more accepting the risks that
are trying to maximize long- risk-taking in markets and come with a faster growing
term growth, they should businesses, the faster growth economy. []
aim to return to the average will more than make up for a
growth rate of the previous few more recessions even
five-year expansions - even a Great Recession. This
Hamilton Place Strategies 4