The trouble with stagnation


Here's an interesting graph from that McKinsey report I mentioned yesterday. The dark blue line represents UK GDP to 2030, assuming trend (2.5%) growth. The mid-blue line shows what would happen if we had a double dip, followed by a return to trend growth in 2013. The light blue line shows what would happen with sustained, below trend growth.

What is interesting (and obvious) on this graph is how economic stagnation and sclerotic growth (think Japan) hurts the UK far more in the long run than a double-dip followed by renewed growth.

This is not just idle speculation either. There is a strong case for saying that efforts to prevent a double-dip recession (propping up failed banks, fiscal and monetary stimulus) prevent the market adjustments – liquidation of bad investments, restructuring of debt, reallocation of resources in line with changed consumer preferences, and so on –  that make a return to strong growth possible.

Reflationary policies (as favoured by Keynesians and most monetarists, but not by the Austrian school) may spare the short term pain of a double dip recession. But if you take the long term view, are they really doing us any favours?