Fifteen years after the collapse of the US investment bank Lehman Brothers triggered a devastating global financial crisis, the banking system is in trouble again. Central bankers and financial regulators each seem to bear some of the blame for the recent tumult, but there is significant disagreement over how much – and what, if anything, can be done to avoid a deeper crisis.
How does one describe an economy betwixt and between boom and slump – the state of much of the world today? Growth is too low, unemployment is too high, but the economy is not actually contracting, but bouncing along somewhere near zero growth, with bursts of low growth interspersed with plunges into negative territory. Keynes talked about ‘long dragging conditions of semi-slump, or at least sub-normal prosperity’; another phrase he used was ‘chronic invalidism’. In these ways he tried to denote a condition in which there was no tendency to become either much healthier or much sicker. Technically, this was his state of ‘under-employment equilibrium’.
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We’re always trying to detect trends: any quarter’s major indicator is extrapolated into a trend, favourable or unfavourable. The international organisations do this the whole time, which is why their macroeconomic growth forecasts are revised each quarter. But suppose there is no trend, just an oscillation, with brief spurts of growth followed by collapses?
This brings me to the real point: to be able confidently to predict a trend one has to have a reason for doing so other than the numbers themselves. For a positive or negative indicator may tell you nothing more than there has been some positive or negative bit of noise which has temporarily lifted or depressed animal spirits. Thus the UK’s burst of growth in Q3 2012 seems to have been due to the temporary boost of the Olympics. But analysts who should have known better thought that it marked the start of the recovery; the next quarter was negative again.
So when people tell me that we have ‘turned the corner,’ I want to know why they think so. At present I don’t see any convincing reason to believe this. UK GDP per capita is 6% lower than its pre-crisis peak. Average real incomes have been falling for the past five years. In the UK the fall has been the largest among advanced economies. These incomes provide the markets for goods and services. So where is the growth coming from?