Counterparties: This time is entirely normal
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How you feel about the American economy right now depends on your answer to one question: are we recovering from a recession or from a financial crisis?
Renowned academics Kenneth Rogoff and Carmen Reinhart aren’t happy with the way a group of economists associated with the Romney campaign are answering this question. “We we have to take issue with gross misinterpretations of the facts,” they write in a Bloomberg op-ed, which summarizes their new white paper (PDF here).
At issue is just how strong America’s recovery has been since 2007. That answer, as Ezra Klein put it, begs the question “compared to what?” Reinhart and Rogoff take aim at Romney advisers Kevin Hassett, Glenn Hubbard and John Taylor, who claim that America’s recovery has been subpar compared those following typical recessions. In a campaign white paper, Hubbard, Taylor and Hassett write: “The historical record is clear: our economy usually recovers quickly from recessions, and the more severe the recession, the faster the catch-up growth”.
A recession, however, is not the same as a crisis. Reinhart and Rogoff differentiate between a systemic crisis, which is centered on a country’s financial system, and the general ups and downs of the business cycle. (Economies generally recover relatively quickly from the latter). Nine months before Lehman collapsed, Reinhart and Rogoff write, the US was already displaying signs of a systemic financial crisis, including “a real estate bubble, high levels of debt, chronically large current-account deficits and signs of slowing economic activity”.
So how does the US recovery compare to other recoveries from big, systemic crises? First, Reinhart and Rogoff argue that recoveries from financial crises are characteristically slow — this was covered in their seminal 2009 book “This Time is Different“. Real per capita GDP took 11 years to recover after the Great Depression; it took five years to recover after the Panic of 1907 and the crises in the late 19th century. We’re four years into the recovery right now, which means that although we still aren’t back to pre-crisis levels, we’re not doing worse than we did before.
Second, they add that US output per capita and employment are doing better than average compared to other countries that suffered recent financial crises. Compared to the periods after other US financial crises, they write, “the recent recovery looks positively brisk”. Paul Krugman agrees with Reinhart and Rogoff’s complaints, saying that the “proposition that financial crises change macroeconomic outcomes is surely one of the big things we’ve learned in recent years”.
A recent study expands on Reinhart and Rogoff’s argument. “This time actually is different – and worse – in one very clear and measurable dimension”, Mortiz Schularick and Alan Taylor write. Excess credit, it turns out, has slowed our economic recovery considerably. Compared to other historical credit busts, they argue, “the US has done quite well.”
But, could the US recovery have been even quicker? Ezra Klein spoke to Carmen Reinhart, who said: ““I have to wonder whether nationalizing banks during a crisis is the cleanest and swiftest way out. Anything that delays the adjustment, that delays taking the hit, delays the recovery”. – Ryan McCarthy
On to today’s links: