Wednesday, 11 September 2013

The Yakiniku Recovery

By Kaleidic Economics

One scenario facing the UK economy is that of the “BBQ recovery” – low and slow. Compared to alternative scenarios, such as another unsustainable boom, or a debt-deflation spiral, it might be the best we can feasibly hope for. But to economists that sympathise with the Austrian school, it may actually be better than that. If NGDP growth of 5% per year is deemed high enough to generate bubbles, returning to it should not be considered ideal. Indeed consider the position attributed to Hayek:
“The moment there is any sign that the total income stream may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.”
This might be treated as similar to a 0% NGDP rule, which would result in any productivity gains manifesting themselves in mild price deflation. If this is the case, the “growth” enjoyed in 2002-2006 should be considered a mirage, and be replaced by a more modest rate (and indeed in NGDP terms perhaps a flat one). Those who advocate such a productivity norm (e.g. Selgin 1997) do not see all instances of falling prices as being undesirable. On the contrary, the norm of sustained inflation can cause immense economic harm. Real growth at its potential, and falling prices, would be welcome.

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