This time is different, again?

By Don Alexander
Associate, RSD Solutions Inc.
Mr. Alexander also lectures at NYU and SunySB

The strength of the US recovery has become a political issue in the presidential election. The US is doing better than other advanced economies, but some economists associated with the Romney campaign say this is not good enough. The US, they argue, is different.

Carmen Reinhart and Ken Rogoff, in a recent VOXEU communiqué - This time is different, again? The US five years after the onset of subprime (Oct. 22^nd) – argue that US historical performance is not different when it is properly measured, so the economy’s performance is better than expected.  The authors note that GDP per capita in the US remains below its initial level while unemployment rate is still hovering near 8%. This is typical of downturns that are associated with systemic banking crisis that tend to be deep and protracted.

A number of op-ed writers and economists stress that the US is also 'different' noting that recoveries from earlier recessions associated with financial crises have been rapid and strong. The authors suggest part of the confusion is a failure to distinguish systemic financial crises from more minor ones and from regular business cycles.  A systemic financial crisis affects a large share of a country’s financial system and are distinct from less severe events that do not cause a systemic meltdown ('borderline' crises). The distinction between a systemic and a borderline event is well established according to widely accepted criteria.

How a recovery is measured is also important as is the way success is defined. The recent pundit focus on GDP growth immediately following the trough (usually four quarters).  This is characterized as a V-shaped recovery, the old peak level of GDP is quickly reached, and the economy returns to trend within a year or two.

According to metrics established by the authors in earlier studies, the aftermath of the current US financial crisis has been quite typical of post-war systemic financial crises around the globe. If one really wants to focus just on US systemic financial crises, then the recent recovery looks positively brisk.  In addition, they look at systemic crises in other advanced countries and find that the recovery has the same metrics.

While no two crises are identical, there are some robust recurring features of crises that cut across time as well as across national borders. Common patterns as regards the nature of the long boom-bust cycles in debt and their relationship to economic activity emerge as a common thread across very diverse institutional settings.

The most recent US crisis appears to fit the more general pattern that the recovery process from severe financial crisis is more protracted than from a normal recession or from milder forms of financial distress. There is certainly little evidence to suggest that this time was worse.  This does not mean policy is irrelevant. There was almost certainly a palpable risk of another depression.  The challenges in recovering from a financial crises are daunting, an early recognition of the likely depth and duration of the problem would be helpful in assessing various options and their attendant risks.  The latest US financial crisis and fragile recovery, yet again, proved it is not different.

www.voxeu.org/article/time-different-again-us-five-year