Harvard economists Carmen Reinhart and Ken Rogoff, authors of the famous 2009 book This Time is Different: Eight Centuries of Financial Folly, are back with a study reporting their follow-up research on how major economies of the world are dealing with the aftermath of the financial meltdown.
To recap, for those who left for an extended intermission in this conversation and have become hazy on Acts I through III of this five-Act drama:
- Systemic banking crises, as a large part of the world experienced in 2007—2008, provoke decidedly different recessions than your garden-variety Econ 101 recession, where excessive consumption leads to a spike in inflation leading to central banks’ tightening the screws leading to disinvestment leading to layoffs leading to dampened consumption leading to more layoffs leading to more dampened consumption, etc. This can all be reversed by central banks’ loosening up again and pent-up demand working its wonders.
- Today nominal interest rates are extremely low and real interest rates are arguably zero or negative. This means central banks’ key weapon lacks any further ammunition.
- Reinhart & Rogoff found in their 2009 book, among other things, that:
- 43% of the 100 episodes of systemic banking crises they examined resuled in double-dip recessions;
- The median time to recover to pre-crisis levels of income was 6-1/2 years; the average was 8 years; and
- The average per capita dip in GDP was nearly 10% from peak to trough.
Their new study finds that of the 12 leading economies they’ve examined in the wake of the 2007/8 crisis, only Germany and the US have returned to their peak in real income.
The headline, such as it is for an academic paper (released at the annual convention of the American Economic Association, here in New York this week), is that all of the strenuous debate in the media about “what’s wrong” with this recovery compared to our bouncebacks from other recessions over the past 50 or 100 years is that this is not a regular recession; the only meaningful and “fair” comparison is to recoveries from other systemic financial-crisis-driven recessions.
And on that score, we’re performing reasonably well—painful as it is for all the individuals and families hit hard. In the US:
- Peak to trough drop in per capita output was “only” 5%
- It took “only” six years to get back to the pre-crisis peak
- And there’s no double-dip in sight
Granted, unemployment is still far above our post-WWII experience, and long-term unemployment, especially among the young and minorities, is excruciatingly high.