Intensive Care

Just like a particle accelerator produces a string of strange phenomena, a pandemic-stressed economy churns out elements that do not comply to long-standing theories. Negative interest rates and oil prices are but two of the curios that breeched the walls of convention. The former already existed in the pre-corona era, whilst the latter represents an event never observed before.

Another economic law that ended on the scrap heap of busted myths is the inverse correlation between inflation and unemployment as evidenced by the Phillips Curve, named after the New Zealand economist who studied centuries’ worth of economic data to prove his point: when inflation creeps up, unemployment numbers ease and vice versa.

To crunch the numbers and illustrate the effects of shifting spending priorities, ‘Bill’ Phillips in 1949 designed and built a hydraulic computer that used coloured water and an intricate web of pipes, sluices, and reservoirs to mimic the path travelled by money as it trickles through society.

The MONIAC (Monetary National Income Analogue Computer), also known as Bill’s Financephalograph, provided its builder and others with the insight that a trade-off exists between a strong economy and low inflation. The consensus is that Mr Phillips would have won a Nobel prize had he not passed away, aged 60, in 1975.

According to prominent economists, the Phillips Curve no longer seems to reflect or predict present-day reality. Actually, its elegant path was first broken in the 1970s when stagflation reigned supreme and economies suffered both high rates of inflation and unemployment. This gave latter-day monetarists such as Milton Friedman the courage to dismiss Mr Phillips’ research as irrelevant to longer-term economic trends.

Although both sides of the debate presented vast volumes of evidence to support their stance, it looks as if facts on the ground have created another reality altogether: just before the pandemic struck, most advanced economies shared a set of similar, yet historically unique, features: low growth, low inflation, and low unemployment. This was not supposed to be possible.

Thus, we unknowingly may have entered the realm of the bizarre years ago. The threshold seems to have been the banking crisis of 2008 and the Great Recession that followed in its wake. This is when strange phenomena first appeared, perhaps reflecting the bewildering patchwork of solutions implemented to keep weakened economies on life support. The patient never fully recovered and has now been returned to intensive care.