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Scholars: Lackluster recovery is par for the post-crisis course

bbjackson.jpgBy Neil Irwin

JACKSON, Wyo. -- Ben Bernanke may get all the headlines for his speech Friday morning at the annual economic symposium, but immediately following his speech, the first paper being presented offers some dour perspective of why the Fed chairman is in a difficult spot.

Carmen Reinhart and Vincent Reinhart have authored a paper examining the historical record of economies that experienced a major financial crisis over the ensuing decade. And the results are rather sour news for anyone expecting the U.S. economy to bounce back from the Great Recession rapidly.

Indeed, their major takeaway is that the weak, slow recovery the U.S. has experienced over the last year is well within the historical norm for nations that experience a deep crisis.

They analyzed the economic results following three global financial crises--the aftermath of the 1929 stock market crash, 1973 oil shock, and the current experience--and 15 crises in both advanced and emerging nations.

The results: Among advanced economy, per-capital gross domestic product is now about 2 percent lower than it was in 2007, which is comparable to the experience three years after the onset of the 15 severe financial crises studied.

A similar story is true on the unemployment rate and home prices. And the major driver of this cycle is the deleveraging of households in crisis-affected countries. In the decade before a crisis, the ratio of domestic credit to GDP climbs about 38 percent, and a comparable decline happens after the crisis, but that deleveraging is "often delayed and is a lengthy process lasting about seven years."

For my money, the most depressing piece of the Reinhart-Reinhart analysis comes on page 15. "The stark difference between the pre- and post-crisis experience raises the question as to whether the unemployment rate ever returns to its pre-crisis level," the Reinharts write. In 10 of the 15 episodes they studied, the answer was no. For example, four of the five countries that were part of the Asian crisis of 1997 to 1998 have yet to see unemployment return to its pre-crisis level.

The analysis is based on a data set that Carmen Reinhart, a University of Maryland economist, compiled over the past decade with Kenneth Rogoff of Harvard. She authored this paper with her husband, a scholar at the American Enterprise Institute.
The Reinharts do not attempt to draw conclusions of this analysis for public policy (though I won't be surprised if the discussion period here in Jackson Hole veers that direction). But a clear subtext is that policymakers should not assume that there is a magic potion that will prevent a slow and gradual return to prosperity in the wake of a crisis, however much we would all like to find one.

By Washington Post Editors  |  August 27, 2010; 11:00 AM ET
Categories:  *Economic agenda , U.S. Economy  
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Comments

- How Sad!- The American People are Not stupid,- but Are very very Ignorant about the private bank called the FED! - These $BANKsters are behind the CRISIS. - They create 'Funny-Money', and then multiply it X's 10 thru Fractional Reserve Banking Practices,-- then loan this Fake money to YOU, and charge $$Interest, which equals "DEBT"!! -- What a PONZI Scheme America!- And YOU Suckers foot the $Bill!! -- What's as bad is that CONGRESS goes along with this Criminal Un-Constitutional CRAP!! -- "ENOUGH"!! -- WE-the-People must take Our' REPUBLIC back NOW!! -- Repeal the Federal Reserve Act!! -- And send those Globalist Central $BANKster Thugs back to Europe where they came from back in 1911-1913!! -- Please Patriots do Something! - Stop just Talking and fighting among each other! -- The Democrats against the Republicans is what the $BANKsters want. -- Because behind-the-scenes,- and under-the-table,- they control Both!! -- And the JOKE is on YOU,- the U.S. Citizenry!!! - END this Economic Terrorist RAPE of Our' Great REPUBLIC!!! -- Repeal the Federal Reserve Act,-- and End 'Fractional Reserve Banking' NOW!! --- Plus VOTE OUT the RED & BLUE Traitors whom support these Globalist $BANKster Cartels!!! -- Patriots UNITE,- and start a new Patriot People's Party!!! -- Our Founding Fathers would be so Ashamed at Our' do- NOTHING ATTITUDE!!! -- - Your' Life, Families, Freedoms. & Nation are at stake!!! -- jward52

Posted by: jward52 | August 27, 2010 12:59 PM | Report abuse

My sense of this economy is based more on psychology than economics but we both come to the same conclusion. In these days of instant information and very public debate about what to do, what to cut, who should pay etc. ordinary people will simply sit by and wait for an outcome. Even people with money are waiting and agonizing over major purchases. Will a retiree's income be cut if it includes a social security component? Will homeowners lose the mortgage deduction on which they based the decision to own rather than rent? Will the million dollars left in the retirement account continue to erode further in this market that seems to offer no hiding places? Uncertainty is the culprit in such cases.

Posted by: Anonymous | August 27, 2010 1:07 PM | Report abuse

What a relief! I feel so much better now that the intelligentsia have assured me history is on my side. Only a few more years of economic reversal and all will be right. You've gotta love these folks.

Posted by: Diogenes | August 27, 2010 1:26 PM | Report abuse

Things change but not for the economists.

Who was it who told us housing prices would always go up and not down?

See we look at past events and simply ignore the present and changes from the past events.

Big surprise to the French generals in World War II that were still fighting and thinking in terms of World War I.

And of course the economists come out with the "real news":
Slow and weak recovery is common with large economic collapses.

A real revelation that the patient that suffered a massive heart attack is not immediately dancing or fighting bulls.

And of course there is no awareness to these economists that an economy simply might never recover.

Apparently to economists an economy is not a patient and economies always recover.

Posted by: bsallamack | August 27, 2010 1:39 PM | Report abuse

I question why the recession of 1981-1982 was intentionally overlooked for this "scientific" and "historic" look back.

For my money, I'd pay to recieve a copy of "How to make poor nations rich." Then use a little imagination to comprehend the opposite can be affected. I'm pretty sure they had more data points. I'm pretty sure we are going in the wrong direction as a nation.

I watched with facination on You Tube (because the news would not carry it) when the first TEA Party events sprang up on April 15, 2009. They get it. Obama, Pelosi, and Reid don't.

See ya'all in November.

Posted by: Anonymous | August 27, 2010 2:11 PM | Report abuse

What economists were saying that housing prices would always go up and not down? There are none, none reputable anyway. No one except people with a vested interest in high housing prices, real estate agents, mortgage lenders, etc., ever said housing prices always go up never down. Now for sure a lot of people bought with that assumption but it was they were wrong.

Posted by: ronjaboy | August 27, 2010 2:49 PM | Report abuse

Pandering to Obama's left wing regime by The Washington Post is also par for the course.

Posted by: Anonymous | August 27, 2010 2:51 PM | Report abuse

There is little doubt that there is some substantial truth to the idea that there are common characteristics of human behavior that tend to create financial crisis and influence the trajectory of the crisis and the events that follow in its wake. But there is also a major reality to long term trends that have lead to major changes in the way human beings live. The adoption of agriculture and of industrialized manufacturing are two major examples. While our current experience surely does have commonalities with past crises, the unique characteristics of our current long term economic problems and the new strains of emerging post industrial society are far more important. Anyone who expects a rapid resolution to any crisis on the scale of the 2008 financial system crisis is ignoring the lessons of history. But anyone who expects to find the path to a better American economic future primarily by looking at history is also making a large mistake.

Posted by: dnjake | August 27, 2010 3:03 PM | Report abuse

"For example, four of the five countries that were part of the Asian crisis of 1997 to 1998 have yet to see unemployment return to its pre-crisis level."

And how many of these had a massive trade deficit like the USA has?
NONE!
Useless study to support the status quo and the greedy elites.

USA needs Tariffs!

Posted by: Elisa2 | August 27, 2010 3:07 PM | Report abuse

Those criticizing the Reinharts' paper didn't read the entire article. They did not draw conclusions of the analysis but simply presented detailed historical data. The recession of 1981-1982 was probably ignored since it was a mild event one that did not come anywhere near the magnitude of the other events.
Other posters rant about economists being so wrong, and some have been very wrong, but this is simply an ANALYSIS of data. One might infer that the recovery will be a slow one because the cause was a build up over several decades.
Other economists have looked, and will look, at the root causes like financial institutions engaging in dangerous lending for short-term profit, businesses (especially large ones) outsourcing productivity overseas, and consumers spending a LOT of money they did not have. Deregulation, unwise tax cuts and two un-budgeted wars were too much for the economy to absorb.
Think of it personally. Say that over the past 10 years you bought a home larger than you could afford, bought a Lexus on credit, had a major illness that cost you time off from work, and had your salary cut by your employer. Do you think that any sudden action (other than a big lottery win) would put you back where you were? No. You will need to work on a slow recovery of your finances. Some short-term borrowing may be necessary to get "over the hump" but then you will have to reduce spending and maybe get a second job to recover.
Read the article and THINK, folks. The stimulus helped save us from complete collapse but it will be up to the government (regulate and cut costs) and industry (start hiring US workers) to bring us back over the next few years. The so-called "Tea Party" does not get it. They are too narrowly focused on only one aspect and forget the big businesses they back are the other part of the problem.
Canada, with all their social programs and higher taxes, is in a lot better shape financially than the US, then though the US economy greatly influences our neighbors to the north.
1. Regulate industry and banking
2. Raise taxes on the wealthy (they still will have more money than they can spend)
3. Provide social programs
4. End the idiot, unnecessary wars
5. Control illegal immigration
6. Reward companies for creating GOOD full;-time jobs

Posted by: pjohn2 | August 27, 2010 3:20 PM | Report abuse

Anyone who has read Reinhart's book with Rogoff "This Time is Different" will have already covered his head with his hands and hunkered down for the long haul.

Posted by: Anonymous | August 27, 2010 3:53 PM | Report abuse

Those would be Democrat scholars. The kind that get s feeling running up their legs when the great one speaks. The kind that have as much actual job experience as does the lord Obama.

Posted by: Anonymous | August 27, 2010 4:37 PM | Report abuse

Thank you, pjohn2 for your thoughtful comments. We don't need an anti-business agenda, but we do need an activist agenda to put people to work and help the economy recover, so consumer demand picks-up and private employers have more confidence in hiring new employees. To help get us there, I would suggest a very large, principled program of direct public investment and employment that can put millions of people to work, both directly on federal projects and indirectly through the spin-off created by those projects. It is clear from the economic analysis of the Recovery Act that it has significantly added to GDP and has put several million people to work, but it is running out. So, here are some ideas: (1) enact a "Rebuild America Now" Act" that would dedicate this decade to rebuilding all of America's infrastructure, and then insulate the Act from annual fights over appropriations by providing for a continuing appropriation for ten years and the issuance of "Rebuild America" bonds; (2) the "Teach Our Kids Well" Act that would put 3 million teachers' assistants in our classrooms all over America; and (3) re-start the Civilian Conservation Corps, which FDR used to put 2.5 million unemployed (generally younger adults) to work, but expand its scope to include urban projects, not just rural ones. The goal ought to be - and can be - to reduce the unemployment rolls by 4 million people in the first year, and additional millions in the following years. To pay for these programs, I would simply say that ending the Bush-era tax breaks for the richest among us will do the trick. If more money is necessary, a "moratorium" on the most egregious corporate tax loopholes for as long as necessary to bring the books into balance. Finally - if I were advising Obama, I'd tell him to roll out these ideas (and more) in a big Labor Day speech, demand Congressional action right after the elections, and take the fight to the American people. Let his opponents argue for the rich while he argues for the jobs. I'd then invite the Republicans to put up their leaders to debate him on national television two weeks before the election. They say they want to nationalize the election, well he should say OK, let's take it to the people. Bring it on. This would certainly change the conversation, wouldn't it? And I think it would be healthy for the country. Let the American people see Obama and his opponents go head-to-head, and then decide the course they want for the country to pursue. That way, the 2012 elections can truly be a mandate for which ever side prevails.

Posted by: Anonymous | August 28, 2010 8:57 AM | Report abuse

Chairman Of Joint Chiefs Of Staff Says National Debt Is Biggest Threat To National Security

Submitted by Tyler Durden on 08/28/2010 09:33 -0500


Not China, not Russia, not North Korea, not Iran, not terrorists...According to Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff, the "single biggest threat" to American national security is the US national debt, which is either $8.85 trillion (public debt), $13.4 trillion (total national debt), $20 trillion (total debt including GSE debt), or $124 trillion (total debt including unfunded obligations), depending on one's definition of the word "debt." And as Zero Hedge has long been warning, the imminent increase in interest rates (sooner or later), will eventually put the country in an untenable funding position. "Tax payers will be paying around $600 billion in interest on the national debt by 2012, the chairman told students and local leaders in Detroit." The Chairman (the real one, not his pale imitation over at Marriner Eccles) politely forgot to add that the successful rolling of nearly $600 billion in debt per month is likely an even greater threat to national security.

Posted by: Anonymous | August 28, 2010 12:03 PM | Report abuse

I'm just wondering how the last sentence including the phrase "... magic potion that will prevent a slow and gradual return to prosperity ".. using the word "prevent" instead of "provide", made it through the editing process. Obviously "provide" is what was meant and intended in that context. Doesn't anyone actually read for meaning? How about the author? Curious.

Posted by: Anonymous | August 28, 2010 12:25 PM | Report abuse

Reading the NY Times article on this presentation confirmed my conclusion that the authors and most of the audience are lost in an academic fog. It is certainly true that the extent of the recent financial crisis has compounded our economic problems. Clearing away the wreckage of its aftermath will take years. But that process is far less important than facing up to the long term economic problems that set the stage for the financial crisis in the first place.
For example, those looking for a recovery in housing prices should recognize that recovery is what the crisis produced. Robert Shiller's data shows that housing prices are not particularly cyclical. The housing price bubble encouraged by government policies of the last downturn produced housing prices that were far in excess of anything experienced in the last hundred years. The financial crisis has lead to a recovery of housing prices close to the already relatively high level that has been experience over the past few decades. But, housing prices need to drop a little more to achieve a full recovery to a normal level.
For another example, those looking for a recovery in the level of excessive American consumption are probably going to be disappointed. The loss in jobs and the rise in the American trade deficit that has undermined our ability to sustain that level of consumption has been going on for more than the last decade. Much of this process is linked to a long term reversion toward the mean from the excessive level of American global dominance as a result of the outcome of World War II. A related phenomenon of reversion toward the mean is in the reduction in the economic position that the European world achieved by dominating the industrial revolution.
Those hoping for a recovery of a stock market boom should take a look at Robert Shiller's data and also at long term historical charts of major market indexes. Stock prices do seem to follow some pattern of long term cycles. Peak 2000 stock prices were also at hundred year extremes. We have yet to complete the downtrend that will recover more normal levels.

Posted by: Anonymous | August 29, 2010 6:33 PM | Report abuse

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