From One Standpoint, U.S. Economy Looks Fine ; Historical Analysis Finds Relatively Rapid Recovery from Subprime Crisis

Article excerpt

Two Harvard economists conclude in a new study that relative to previous American financial crises, the current economy is doing substantially better.

Academic heavyweights have been debating whether the United States economy is so sluggish because of too much government stimulus or not enough, or because slower growth had become the norm even before the recession.

But maybe these arguments share a faulty premise.

The American economy is actually doing reasonably well -- at least compared with what would be expected after a major financial crisis -- according to a provocative study from Carmen M. Reinhart and Kenneth S. Rogoff, Harvard economists and financial crisis historians whose work has been attacked and embraced by the political right and left.

The study, presented over the weekend at the annual meetings of the American Economic Association, rejects comparisons with regular postwar American recoveries, as other economists have made, and instead examines 100 major, or "systemic," financial crises that have occurred over the last two centuries, in the United States and elsewhere.

It found that relative to previous American financial crises, the economy is currently doing substantially better. Across nine major financial crises in the United States, the average peak-to-trough decline in inflation-adjusted per capita gross domestic product is about 9 percent, and it has taken an average of 6.7 years to recover to the precrisis peak. During the years after crises, five of the nine episodes also had a "double-dip" downturn.

By contrast, the recent American subprime crisis beginning in 2007 had "only" a 5 percent drop in per capita output and took "only" six years to get back to the precrisis peak. And so far,, there has been no second downward turn.

Employment and other measurements remain well below their precrisis peaks, but it is difficult to compare those numbers with past crises because the historical data for those categories are not as reliable, Ms. Reinhart said. Relative to its current peer countries, the study says, the United States is also doing unusually well.

Eleven other countries had systemic crises around the time the United States did: France, Germany, Greece, Iceland, Ireland, Italy, the Netherlands, Portugal, Spain, Ukraine and Britain. Six years later, just two of them -- the United States and Germany -- have recovered to their previous peak in real income.

While the United States has been doing well relative to historical crises, the other advanced countries seem to be doing especially poorly compared with their performance after previous crises.

"This crisis may in the end surpass in severity the Great Depression in a large number of countries," Ms. Reinhart said in an interview. "In fact, it may very well have one of the most protracted and painful recoveries for advanced countries in the aggregate."

Historical data show that it takes about 7.4 years for the average advanced country that experienced a major crisis to reach its prior peak in real per capita income; with nearly seven years gone by since the 2007 crisis began, many advanced countries still appear to be contracting.

Ms. Reinhart offered a few explanations for why the study showed the United States doing unusually well compared with both its past self and its current peers, however bad it still feels to the typical American worker. Among the biggest likely contributors are the major monetary and fiscal stimulus measures American policy makers undertook early in the crisis, which helped limit losses from the recession. …