IN A British television show, “Doctor Who”, the titular character is able to travel anywhere in time and space in his Tardis police box. Given access to that technology, what useful message would this columnist impart to his previous self, nearly 12 years and 550 columns ago?
The first lesson would be to avoid confusing the economy with the financial markets. If you looked at share prices alone, you might assume the intervening period had been calm; the S&P 500 index is around double its level when this column began in September 2006. But though the markets have long since recovered their sangfroid after the crisis of 2008-09, the trend growth rate of developed economies has never regained its strength. That is a bitter irony given that the crisis originated within the financial sector, bringing to mind a teenager who crashes their parents’ car and leaves them with the bill.
In part, the market’s resilience was owing to the remarkable strength of corporate profits, something else that would not have been obvious 12 years ago. Back then American profits were only just reaching a post-war high, relative to GDP. When they plunged in 2009, it looked like a return to normal. But the pre-crisis levels were rapidly regained and, indeed, surpassed. Explanations for the strength of profits include less competition in some...Continue reading