Scholars: Lackluster recovery is par for the post-crisis course
By 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.
Washington Post Editors
August 27, 2010; 11:00 AM ET
Categories: *Economic agenda , U.S. Economy
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