The shrinking output gap
The most interesting bit about the chancellor, George Osborne’s autumn statement this year wasn’t all the stuff on how long weak growth will go on for, or how bad Britain’s public finances are.
We knew all that already. Economies can’t grow when they’re suffering the deflationary effects of a banking crisis, the inflationary effects of a poorly supported currency and the deadening effects of a vast state. It doesn’t matter how much fiddling you do, transferring bits of money from one special interest group to another, unless you take radical action to get rid of one of your problems (deflation, inflation or the government), all you can do is thank your lucky stars if your economy isn’t actually shrinking.
I imagine that’s what George Osborne does in private, while simultaneously praying for global bond markets to continue to be fooled by his spurious claims of austerity even as he increases the national debt by 60% in his first parliament alone.
So, to the interesting bit: the admission by the Office for Budget Responsibility (OBR) that Britain’s potential output is smaller than it was pre-crisis. A proper credit bubble followed by a real banking crisis permanently damages an economy. Capital is misallocated and low rates allow capacity that should never have been created to be created. All of a sudden, demand disappears as do all loans and access to working capital. Businesses that go bust under these circumstances represent permanently destroyed productive potential.
• Read the full editor’s letter here: The shrinking output gap.