October 17, 2012

Reinhart and Rogoff Rebuke Romney Economic Advisers

Economist duo says evidence does not support the idea that economic recovery from current crisis has been slower than average

Carmen Reinhart and Kenneth Rogoff, economic historians famous for their book deriding the notion that new financial crises differ from their predecessors, took up their pens again—this time to critique economists advising the Romney campaign who say there is something unusual about the absence of an economic recovery today.

In a paper published earlier this week, and a shorter Bloomberg View op-ed, the economist duo say their intention is not to wade into policy disputes. Rather, they seek to defend the finding of their extensive research that the U.S. is not somehow different from other countries that have experienced slow recoveries from financial crisis.

Kenneth RogoffReinhart and Rogoff (left) cite recent op-eds by Kevin Hassett and Glenn Hubbard, both American Enterprise Institute scholars, the Hoover Institution’s John Taylor and Michael Bordo of Rutgers University, as promoting the idea that the U.S. has recovered from financial crises more rapidly in the past.

These writers, all Romney supporters, ignore the fact that “recessions that are associated with systemic banking crises tend to be deep and protracted and that this pattern is evident across both the historical and cross country experience,” the authors say.

Five years after the start of the current crisis, Reinhart and Rogoff say “there can be little doubt that the United States has experienced a systemic crisis.” In their 2009 book, “This Time Is Different: Eight Centuries of Financial Folly,” which examined 224 historical banking crises from around the world, the authors found that recovery was a long slog: taking on average four and half years to return to pre-crisis peak GDP per capita in the post-World War II period and 10 years on average in economies that buckled during the Great Depression.

Reinhart and Rogoff single out a working paper by Bordo and Joseph Haubrich published in June as the basis for the other economists’ faulty op-eds. That paper states that the “the 1907-1908 recession was followed by vigorous recovery.” Reinhart and Rogoff retort that “the level of real GDP per capita in the US did not return to its pre-crisis peak of 1906 until 1912. Is this a vigorous recovery? The US unemployment rate…was 1.7 percent in 1906, climbed to 8 percent in 1908, and didn’t return to the pre-crisis low until 1918.”

The two authors say that, five years on, recovery from the most recent U.S. financial crisis “has been quite typical,” and has been better than average “in terms of output per capita and unemployment.”

Reinhart and Rogoff’s rebuttal of the Romney economists is not the first time the economist duo banded together to defend their thesis from what they regarded as a distortion of the data. Six months ago, also in Bloomberg View, the economic historians assailed the “rosy scenario” presented by a Federal Reserve working paper.

That paper misused data to argue that post-financial-crisis recoveries enjoy the same pace and strength of normal post-recession recoveries, Reinhart and Rogoff wrote in April.

“It is essential to measure where an economy stands compared with pre-crisis levels of important variables such as output, unemployment and housing prices,” Reinhart and Rogoff wrote at the time.

Of the economists supporting Romney, just one so far has responded to Reinhart and Rogoff’s rebuttal. Writing on his blog, Hoover economist John Taylor had this to say:

“Reinhart and Rogoff argue in favor of a narrower definition of a financial crisis, and they thus focus on a subset of the eight Bordo-Haubrich recessions with financial crises (for example, they exclude 1913 and 1982). This alone does not change the Bordo-Haubrich results … But Reinhart and Rogoff argue that one should look at the downturn as well as the recovery when looking at severity. There is no disagreement that recessions associated with financial crises have tended to be deeper than those without financial crises. The disagreement is over the recoveries. By mixing downturns with recoveries Reinhart and Rogoff get different results from Bordo and Haubrich.”

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