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Peter Hall

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Is the Economy Really "Different This Time"?

Posted: 09/26/2013 6:01 pm

There's a clever-sounding phrase that has repeatedly wreaked havoc with the macro economy: "It's different this time." It's used at the top of the cycle, when growth is peaking and the scramble for scarce resources creates the illusion of never-ending expansion.

It's also used liberally in cyclical troughs, when economic downturn seems like a self-fulfilling suppressant. And it's usually dead wrong. But it's all over the place now, couched in neatly nuanced narrative about our "new normal." Is it once again misguided advice, or is there good reason to believe that this time really is different?

The answer really depends on what "different" means. Of course there are features of the economy that are different, unique to the time period. But purveyors of this phrase are going a lot further, arguing that key structural changes have forever altered the operation of the economy. Today's stories usually cite fiscal deterioration, a fractured financial market or lopsided leverage as permanent impediments to growth. The arguments seem compelling, but are they really credible?

Canada's fiscal realignment in the 1990s was hailed as a "new normal", but we got over it in a few years. Global realignment could be strikingly similar; in fact, we are already experiencing an austerity dividend. Financial fiascos are more thorny, but recall that the early-1990s savings and loan crisis in the US -- a purported game-changer -- quickly faded into the growth of the new cycle.

Deleveraging -- this cycle's other deadweight -- is arguably nearing an end. US consumers are in far better financial shape, businesses are cash-rich, and banks are flush with liquidity. True, there are significant problems in each of these cases, but are they anything a little extra growth wouldn't heal?

True structural changes do occur, but they are rare. They usually come in the form of technological changes, wars, epidemics, natural disasters, and the like. To qualify as true economy-altering changes, they need to somehow strike at the three foundational pillars of any economy: its labour force, its accumulated stock of physical capital, and the technical efficiency with which these two are brought together, commonly known as productivity. Key to the question of today's growth potential of our economies is whether these driving factors are any different than five years ago.

Labour isn't. Current labour force growth was determined 15-20 years ago when today's entrants were being born. Neither has Investment in physical capital been altered. Companies can afford to expand, and the only reason they are sitting on so-called "dead money" is that spending it still awaits a compelling growth story. Pent-up demand suggests that's not far off. As for productivity, the duress of the downturn has put this element of the business equation on the front burner; no alteration here.

So if the fundamentals are in decent shape, why are we not realizing more normal growth? In good part because the world has for the past five years been working off the egregious excesses of the last growth cycle -- excesses that were encouraged by pronouncements of a "new era" of growth somewhere in the mid-naughties.

By certain key measures, the binge -- which globalization exported everywhere -- lasted five years. Small wonder it has taken the world five years to begin returning to equilibrium. We don't usually have to wait that long, and impatient analysts -- encouraged by our neo-high-frequency world -- are conditioning the sour psychology of the day, to ill effect. Key indications of the world economy's recent movements suggest that their conclusion is at this point preliminary.

The bottom line? Look at the economy's fundamentals, and it is arguable that, for the moment, the economy is doing over and over again the same thing, with largely the same results. Einstein himself might have something to say about the pre-conclusion that this time, the results will be different.

 
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