Will George Osborne be forever blowing bubbles?

Why does economics consistently produce an equal number of reasons for optimism and alarm, as such existing in a perpetual state of self-cancellation? On Thursday this week George Osborne, the Chancellor, will give the Autumn Statement during which he will no doubt stress, at length, his reasons for feeling confident in the state of the British economy. He might point to the recent increase in estimates of UK GDP, of business investment, or mortgage approvals and of house prices. These rapidly-ascending figures, he will say, are evidence that the recovery is broadening. He will make these statements in the context of an ameliorating global economic picture, not least in the US where joblessness is declining and the concentration of President Obama’s adversaries on the problems with his healthcare scheme is an indicator of how the economy is turning from his weak to a strong suit.

This collection of clement economic indicators means that Osborne’s speech should be delivered in an atmosphere, and spirit, of confidence. There will, however, be a fly in the ointment, and it will have been put there by, not surprisingly, an economist.

Lawrence “Larry” Summers, a former United States Treasury Secretary, is a Harvard Professor who was the President’s candidate of choice to take over at the Federal Reserve next year (Janet Yellen pipped him to the job). His latest formulation is the notion of “secular stagnation,” an idea that has about it many echoes of the demand-side economics put out by the American left in the years since the crash. This demand-based analysis states that only government, business or the public can spend money and in a slump during which businesses and the public cannot spend, government must make up the difference. This demand-side analysis goes on to say that if government does not spend, then an economy will find itself in what has been termed by Paul Krugman, the Princeton economist, “a liquidity trap,” kept there by insufficient demand.

But Summers went on to make a secondary point—that economies now exist in a constant state of insufficient demand. For this reason, he says, economies have had to artificially stimulate demand by stoking housing bubbles and it is only in this way that unemployment can be reduced and economic activity stimulated.

The implication of this is that governments could rationally consider these bubbles a good thing as only by inflating them could they bring down unemployment and get their economies growing.

Seen in this light, Thursday’s Autumn Statement by the Chancellor will begin to take on a more worrying cast. He will point to Britain’s growth—but what is the nature of that growth? Is it “real”, or is it the consequence of the type of bubble envisioned by Summers as the policymaker’s only mechanism for increasing demand?

We will have an answer to that within five or so years, and a clear picture within ten—hopefully a positive one.