Will we ever recover from the financial crisis?
Well, define recovery. If recovery is getting back to the low unemployment levels that preceded the crisis, then no, we might not ever recover. If recovery is just getting back to some more normal-looking growth and job numbers, it's still going to take a very long time.
That, at least, is the conclusion of a new paper from Carmen and Vincent Reinhart assessing the aftermath of severe financial crises and shocks. The two scholars looked at "real GDP (levels and growth rates), unemployment, inflation, bank credit, and real estate prices in a twenty one-year window" surrounding "the 1929 stock market crash, the 1973 oil shock, the 2007 U.S. subprime collapse and fifteen severe post-World War II financial crises." Their conclusion? Settle in. This may take a while.
Real per capita GDP growth, they found, is significantly lower in the decade following a financial crisis than in the decade preceding one. If we're just looking the global crises, the median GDP growth for an advanced economy in the 10 years before the Great Depression was 3 percent a year, and before the 1973 oil shock, 4 percent a year. In the 10 years after both crises, growth averaged 1.8 percent.
And it's the same story for other indicators: Unemployment remains high, with the pre-crisis average being 2.7 percent, and the post-crisis average sitting at 7.5 percent. "In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009." Housing prices tend to be depressed for years, and credit deleveraging takes about seven years (the graph atop this post compares pre-crisis credit booms and post-crisis deleveraging in a variety of economies). "There is little good news to be found," conclude the Reinharts.
It would be nice to believe that we'll be different, but their data are worrying here, too. The run-up to the 2007 financial crisis looked like the run-up to previous financial crises. It wasn't much bigger or smaller, or much faster or slower. If anything set it apart, it's that it was global in nature, where most crises afflict only one country, or one region. That our crisis is global makes recovery more difficult, as it gives us fewer healthy economies to sell things to.
In fact, the paper is depressing enough that the authors offer less in the way of policy advice than psychological coping strategies. "Recent discussions about the 'new normal' in reference to the post-crisis landscape leave the impression that the pre-crisis environment was 'normal,' " they write. "In fact, there are reasons to believe that the pre-crisis decade set a high-water mark distorted by a variety of forces." Matt Yglesias read their study and saw evidence that governments tend to do too little stimulus after financial crises, but that's about it for policy implications. The fact that everyone has done pretty badly after financial crisis implies that we've not quite figured out how to handle them. Anyone got a more optimistic take?