February 5, 2009

Don't believe the hype

Most famously uttered by rapper Flava Flav, but apropos none-the-less. An article posted at www.wsj.com last Tuesday is causing quite a stir. Carmen Reinhart and Kenneth Rogoff compare the current crisis to that of downturns past. The conclusion isn't pretty, and the title, "What Other Financial Crises Tell Us: The lesson of history is grim, Expect a prolonged slump" really says it all. Rogoff is former chief economist at the International Monetary Fund and professor of economics at Harvard. Reinhart's a professor of economics at the University of Maryland. With that kind of pedigree, I'll trust they know what they're talking about.

"When one compares the U.S. crisis to serious financial crises in developed countries (e.g., Spain 1977, Norway 1987, Finland 1991, Sweden 1991, and Japan 1992)," the authors write, " or even to banking crises in major emerging-market economies, the parallels are nothing short of stunning."

Indeed. But after reading the paper I came back to one glaringly obvious point. If the last downturn studied was Japan in 1992, it was before the incredible advances in technology experienced over the last decade. Hell, in 1992 I still had MS-DOS and a dot matrix printer, the equivalent of an outhouse when compared with modern plumbing.

I contacted Professor Reinhart and asked if they controlled for technology in their study. She didn't answer the question specifically, but provided me with the underlying paper on which the article was based. It can be found .

"This is not the time for the U.S. to avoid painful but necessary restructuring by telling ourselves we are different from everyone else," Reinhart and Rogoff conclude in their piece.

True, but I believe these technological advances combined with the dynamism of the American entrepreneur count for something, and will be a significant factor in our recovery.

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