The recession at the end of the last decade was the longest and deepest since the 1930s. In America, they call it the Great Recession. Here we don’t, which is strange because it was every bit as bad. Perhaps the outsize influence of the UK finance sector has caused us to focus more on the causes than the consequences of what went wrong.
Believe it or not, there were people before the crisis who believed there’d never be another recession. Of course, there are always people who act as if there’ll never be another recession — e.g. the suckers who buy at the top of the market just before the crash. But I’m referring to a more select group — those who’d thought about economic stability as a policy challenge and concluded that the central banks had got it licked.
The most important policy we don't talk about
The source of their confidence was the decision of western governments to transfer control over interest rates to independent monetary experts. The hope was that, free from the meddling of fly-by-night politicians, Al Greenspan et al would keep the money supply just tight enough to tame inflation, but never so tight as to strangle growth. It was called the ‘Great Moderation’ — a Goldilocks economy skipping along happily ever after.
But we all know how that turned out, don’t we boys and girls? Goldilocks ran into some very mean bears and was never seen again.
Or was she? The Great Recession (in both the US and UK) ended 10 years ago – and there hasn’t been a recession since, not even a little one.
This is unprecedented, says The Economist:
“Around the world investors, businesses and central bankers are grappling with a startling fact: at the end of July America’s economy will have been growing for 121 months, the longest run since records began in 1854, according to the NBER, a research body.”
No one is talking about a Great Moderation this time around. Indeed, some markets are showing signs of nervousness. And yet other indicators are still positive — not least job creation:
“…in June America’s economy created a whopping 224,000 new jobs, more than twice as many as needed to keep up with the growth of the workforce. “
There are all sorts of things that could still go badly wrong: war with Iran; a chaotic Brexit; a renewed Eurozone crisis; an unforeseen build-up of instability in the global financial system; or a delayed reaction to all those doses of quantitative easing.
Why low interest rates poison the economy
Nevertheless, it’s clear that the economy isn’t behaving the way it used to. But then why should it? Western economies have gone through big and permanent shifts in the past. There’s no reason why they shouldn’t do so again.
We speak of economic ‘growth’ without thinking through the implications of the organic metaphor. In growing, living things don’t just get bigger over time they undergo qualitative changes too. A tree, for instance, isn’t just a larger version of sapling, let alone the seed the sapling grew from. Or take human development: an adult behaves differently from a teenager (or ought to), who in turn behaves differently from a primary school age child, who behaves differently from a toddler.
Perhaps economies are like people in this respect. They grow, and also grow-up. It would be nice to think that we’re moving on from the exhausting tantrums and meltdowns of the toddler economy into something a little more self-controlled.
The Economist notes that while Americans are living through the longest economic expansion on record, the average rate of GDP growth in this period has been significantly lower than in the three previous expansions (2.3% versus 3.6%). But is slower growth a price worth paying for greater stability?
Not in the long run, it isn’t. Seemingly small percentage differences in annual growth will make a big difference when compounded over generations. If you care about the standard of living your children or grandchildren might enjoy when they’re your age now, then the difference between 2.3% and 3.6% is chasmic.
Even in the short run, economic stability isn’t so great if it comes at the expense of political stability. If there’s not enough growth to make everyone feel they’re getting on in life, then you can bet that those missing out won’t he happy about it —A especially if the wealthy (plus a larger cohort of college-educated knowledge workers) take the lion’s share of what’s available.
One theory is that the skewed distribution of the proceeds of growth is what’s causing the long, but slow, expansion that we’re living through. It all starts from the fact that the rich save a greater proportion of their money than the non-wealthy. This means lower levels of consumption and heavier flows of capital looking for a home. Therefore economies are less likely to run short of consumable items or capital. Prices stay low. Interest rates stay low. And the economy strolls on.
Is too much money a bad thing?
The catch is that for too many workers, wages also stay low. So, instead of inflationary pressures building up in the economy, it’s resentment in the body politic.
Can we shift the economy into a higher gear? It would help if the rich could be persuaded to put more of their money into productivity-boosting investments. Smart reforms to the tax system might just do the trick — but only if enough innovations worth investing in actually exist.
The economy’s strange behaviour may reflect a slowing down of technological progress. While we’ve become much better at matching supply to demand and thus avoiding inflationary crunches, some economists fear that we’re not making the big breakthroughs that drove up productivity and wages in 20th century.
If this is true and permanent, then our economy is not leaving its infancy behind but entering its dotage.