An improved job market, the Dow at 13,000, and rising consumer confidence and spending are among the factors that have emboldened some economists to declare the U.S. economy in full recovery mode. A Bloomberg article published Monday quotes the economist Allen Sinai saying “We’re entering a sweet spot for the economy. We’re in a self-reinforcing cycle.” But the economic historians Carmen Reinhart and Kenneth Rogoff, writing in a Bloomberg View article published the same day, argue that financial history does not offer encouragement to the notion that happy days are here again.
Reinhart and Rogoff (left), best known for their epic financial history tome, “This Time is Different: Eight Centuries of Financial Folly,” wrote their article, “Five Years After Crisis, No Normal Recovery,” in response to a controversial Federal Reserve working paper. That paper argues that post-financial-crisis recoveries enjoy the same pace and strength of normal post-recession recoveries. The view of the Fed therefore would buoy those who, like Sinai, are making calls in real time that the economy is bouncing back.
But Reinhart and Rogoff, while expressing hopes for better times, advise that we dare not misconstrue history’s lessons. “It is mystifying that [the Fed economists] can make this claim almost five years after the subprime mortgage crisis erupted in the summer of 2007 and against a backdrop of an 8.3% unemployment rate (compared with 4.4% at the outset of the financial crisis),” the economic historians write.
They say the data show that the economy snaps back within a year or two after normal recessions and growth returns to trend. After systemic financial crises in the postwar period, however, economies have needed 4 1/2 years to reach pre-crisis levels of output.
What’s more, “in 10 of 15 severe post-WWII financial crises, unemployment didn’t return to pre-crisis levels even after a decade” and double-dip recessions occurred “in 7 of the 15 crises.”
In other words, a resumption of GDP growth, which they say is hard to establish in real time, is insufficient to establish recovery. “As we emphasized in our book, ‘This Time Is Different,’ it is essential to measure where an economy stands compared with pre-crisis levels of important variables such as output, unemployment and housing prices,” they wrote.