Duncan’s Economic Blog

GDP: Time to worry about the ‘L shaped’ recession again?

Posted in Uncategorized by duncanseconomicblog on April 27, 2011

We’ve been told today that over the past six months the economy has ‘flat lined’, ‘stagnated’ and been ‘on a plateau’.

All of which is true.

But sometimes a picture really is worth one thousand words.

How long until we start talking about ‘L shaped’ recessions again?

An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop, followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession. Alternative terms for long periods of underperformance include “depression” and lost decade; compare also “malaise“.

10 Responses

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  1. Dave Holden said, on April 27, 2011 at 5:13 pm

    So a doubling of national debt basically lead to a flat line without the benefit of any deleveraging. Makes you think doesn’t it.

  2. Paul Newman said, on April 28, 2011 at 6:00 am

    You think we should return to the debt fuelled asset bubble growth we “enjoyed” under New Labour ?
    Something that in some inchoate way always bothers me about your thinking Duncan is that you do not make any distinction between types of growth or employment . Its as of for you someone doing nothing is the same as someone doing something provided they are paid or that printing money is the same as making money. An L shape is what I expected in fact I am comfortable with it you want to borrow more so as to increase growth.
    How does that help?

    • duncanseconomicblog said, on April 28, 2011 at 7:08 am

      No, I think we should aim for an increase in real wages to drive growth coupled with investment.

  3. Agog said, on April 28, 2011 at 7:11 am

    Sheesh – ‘growth-deniers’ as the man said.

    Counterfactual: if the national debt hadn’t been allowed to increase, for instance if a Tory government had decided to raise taxes and cut benefits at the start of the recession, what would the unemployment rate have looked like by now?

    You think that everything would have adjusted naturally, everyone would retrain instantly, wages would re-equilibrate and we’d all live happily ever after?

    Or that after a ‘nasty’ bubble we all need to suffer to redeem ourselves?

  4. Dave Holden said, on April 28, 2011 at 9:37 am

    @Agog.

    Your projecting – I don’t recall recommending raising taxes are cutting benefits. What has happened is the socialisation of private banking losses. As to living happily ever after – sorry but all that’s happened is the can has been kicked down the road at extreme cost while bankers still get their bonuses.

  5. Agog said, on April 28, 2011 at 5:31 pm

    DH, you say ‘kicking the can down the road’, I say ‘avoided a full-blown depression.’ Things could’ve been a lot worse.

    • Dave Holden said, on April 28, 2011 at 11:14 pm

      Problem is the debts are still there – the risk moved to the government from the banks but where does it move to from there?

  6. Agog said, on April 30, 2011 at 8:40 am

    DH (if you’re still there),

    It stays there until it’s no longer a risk. See Evsey Domar in the 1940s. As nominal GDP grows, the debt keeps on being rolled over as it diminishes in proportion to the tax intake. The trick is getting healthy, productive growth. This is all contra Mr Newman and his fellow growth-deniers and the sound-money fetishists.

    See also, sort of relatedly, Nick Rowe writing about Functional Finance recently:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/functional-finance-vs-the-long-run-government-budget-constraint.html

  7. Dave Holden said, on April 30, 2011 at 9:06 pm

    @Agog,

    Thanks for the Evsey Domar tip I will look him up. I’m reading up on functional finance/MMT it’s an interesting theory with the as far as I can see emphasis on theory so far. However the problem I have with it at present is how little fleshed out it seems on dealing with inflation – peoples savings matter and the incentive to save matters, currency devaluation and malinvestment. It’s my strong suspicion that these things will hit a lot earlier than they imply – that said I’m still learning and open minded on the issue.

    Yes I happened on Nick Rowe’s blog last week – it looks like one I will continue to follow.

  8. […] many ways we now seem to be bouncing along on at the bottom of the ‘L’.Even excluding ‘temporary factors’ (warm weather, cold weather, tsunamis and royal nuptials) […]


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