I\’m quite sure that Larry didn\’t actually mean this

It\’s not all bad news for Britain. There is good reason – not least the end of the VAT holiday – to expect growth to resume in the final three months of 2009

The end of the VAT holiday isn\’t going to raise growth: given that it was cut in order to raise growth that just ain\’t likely at all.

The imminent end of it might bring forward some spending, that\’s true. But then we\’re getting close to the idea which is currently an anathema: that consumers react rationally to future tax changes. And if they do that then deficit spending now doesn\’t boost the economy, for people will save the money in response to those future higher taxes that they know are coming.

Can\’t have it both ways now.

However, this is much more interesting:

And although Britain\’s recession has been the longest in the G7, other nations have seen steeper declines in output.

Indeed. Which leads us to a very interesting question indeed.

Take the US. Which was worse, the 1920/21 recession or the 1929/41 one?

Or if you prefer, Germany 2008/9 and UK 2008/9?

Is it the depth of the recession or the length which is the problem? Might we actually prefer to have a deeper recession but one which is shorter? Certainly, that US experience is that deep but short is better than long.

And there are indeed respectable economists out there (the Austrians) who would argue that we\’ve been making exactly the wrong decisions: we\’ve locked ourselves into a long recession rather than taking the pain quickly. Their basic idea (and of course you all know more macro-economics than I do so this is very much back of a postcard) is that a recession is an acknowledgement of the fact that we\’ve fucked up. We\’ve been doing the wrong things (building too many houses, or investing too much in them, or in finance, or cars, whatever) and that now we\’ve realised this we all need to take a deep breath and work out what we really want to be doing. The recession itself is this period of recalculation. Once we\’ve worked out what we want to do then off we go again.

However, in this view, the propping up of the current structure by various Keynesian methods leads to an extension of this period of recalculation: might well make the recession shallower but inevitably makes it longer.

Which brings us back to, what would we prefer? Deep and short or shallower and longer?

There\’s a very interesting and juicy thought behind all of this. We\’ve seen pretty much a global recession. We\’ve also seen a number of different policy responses. Everyone\’s done a bit of everything (fiscal and monetary) but the proportions have all been different. Give it a few years and we might well find out that current Keynesian orthodoxy isn\’t quite all it\’s cracked up to be. Those who did more of the fiscal stuff might take longer to come out of recession while having had shallower ones. There\’s something about Harberger triangles and Okun gaps (or is it the other way around?) which can be used to tot up which is the best in the long term.

Here\’s hoping that someone actually does that work, eh?

11 comments on “I\’m quite sure that Larry didn\’t actually mean this

  1. What I like about your blog is that you pick up exactly what I do but express it much better , that was a very odd comment wasn`t it and I suspect by means of intestinal intuition you are right on your shoirt sharpshock idea as well . I have always thought so .

    I wonder Tim if , like me , you are amused atthe left pretending they are not sallivating at the thought of Blair for Prez….Moonbat `s turn today.

  2. Very astute stuff. By propping up numerous institutions that were essentially bankrupt, we now have to keep them on financial life support at great expense, even though they should have disappeared several months ago.

    Obviously there was the need to protect individual savers, but that is a long way away from protecting the banks from their own whopping mistakes.

  3. I don’t think anybody would deny that reallocating some resources from some sectors of the economy (say, banking, construction) to others, would be a good thing, but it’s not obvious whether a quick and deep recession is a preferable to a longer shallow one. The idea that recessions just cut away the dead wood is mistaken – lots of perfectly sensible, viable businesses go to the wall too, and this imposes lasting real costs on the economy and on individuals. Say I run a restaurant that would be successful in normal times, survive a shallow recession but would go bust in a deep recession, it’s hard to explain why my restaurant going bust in a deep recession represents a beneficial reallocation. Something similar can be said for “propping up businesses that are essentially bankrupt” … a bank can be bankrupt because of past mistakes, yet have a perfectly useful and viable future ahead of it, in which case it’s not obvious why liquidating the business is preferable to recapitalising it.

  4. “Obviously there was the need to protect individual savers, but that is a long way away from protecting the banks from their own whopping mistakes.”

    Depends what you mean by “the banks”.

    If you mean the shareholders of the institution then they’ve been virtually wiped out (and the remaining stake is being smashed up by the crazy behaviour of the new majority shareholder who is deliberately destroying shareholder value in the pursuit of other aims).

    If you mean the bondholders, they are rapidly losing their protection as the banks default on paying coupons.

    If you mean the corporate institution itself, what precisely is that? The employees? The brand? All of these are being destroyed too.

    My little stake in RBS dropped by 95%. I’d rather have simply lost the lot overnight in liquidation rather than tolerate the endless fucking whining by lefties about “taxpayer-funded bonuses” while still losing the remaining stake anyway.

  5. “Say I run a restaurant that would be successful in normal times, survive a shallow recession but would go bust in a deep recession, it’s hard to explain why my restaurant going bust in a deep recession represents a beneficial reallocation.”

    In a deep, short recession it’s all over in a couple of years and after hunkering down living on savings for a couple of years you can start a new restaurant.

    In a shallow recession lasting ten years you’ll be living hand-to-mouth for the entire time, unable to invest or grow.

    I always like to take a plaster off in one agonizing jerk, not a series of excruciating tugs.

  6. KayTie,

    your analogy begs the question; a plaster is something that has to come off sooner or later. My restaurant doesn’t need to go bust.

    If it’s better to go bust that endure a few years of thin profit, why do companies seek to avoid going bust? Do you think most companies today are a) trying to survive or b) willingly embracing bankruptcy? You might prefer b), I suspect you are in the minority.

  7. “your analogy begs the question; a plaster is something that has to come off sooner or later. My restaurant doesn’t need to go bust. ”

    But we just agreed, it’s not about your restaurant: it’s an innocent bystander. Given that the economy goes through ups and downs, and the down is like taking a plaster off, which (from the perspective of being a restaurant owner) would you rather have? A short-lived catastrophe (going bust, setting up again soon) or a long-drawn malaise?

    “If it’s better to go bust that endure a few years of thin profit, why do companies seek to avoid going bust? Do you think most companies today are a) trying to survive or b) willingly embracing bankruptcy?”

    The company is a corporate body: it does everything to survive. And, from a shareholders perspective, rightly so. But from the perspective of the employees, the creditors, the customers, etc. surviving is often not the best outcome.

    For a government to step in and intervene to “help” usually makes things worse: like a wildlife film crew “helping” the animals they are filming.

  8. This all rather begs the question over whether you do get steep but short and shallow but long, rather than steep and long. Given a fair chunk of the UK’s economy was close to collapse it was always going to be tricky [this incidentally is why I don’t really think the ‘let the banks go to the wall’ would have been a successful strategy, as tempting as it seems, as is surely would have finished the City of London as a major financial centre]

    To make things worse in this recession the UK has also had the unfortunate collapse in sterling, way past its fair value, cheered every lurch lower by the mercantilist media.

  9. Luis/Kay Tie,

    Could not the argument be made, from an economy-level view, that a short and sharp recession in which Luis’ restaurant goes bust is preferable to the long shallow one, because in the long shallow one resources are tied up keeping his restaurant afloat, whereas their release and availability would otherwise help a recovery?

    I am playing devil’s advocate because I really don’t claim to know the answer here. Luis’ restaurant going bust isn’t *nice* for him, but that’s not the point. It may not even be fair – he may indeed have a sound business. Perhaps it’s the case that the correction requires more than just the reallocation of the badly-allocated resources?

    In terms of length (ignoring depth) I think we’d all agree that shorter is better than longer: if you find yourself on the rough end of it, a shorter recession is simply easier to survive. As for depth, maybe the collateral damage of otherwise-sound enterprises is the price for dealing with the problem swiftly? Again, I should point out that “nice” and “fair” don’t come into it.

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