Real Per Capita GDP (levels): 2007-2011 Systemic & Borderline Crises in Advanced Economies

Sources: Laeven and Valencia (June 2012), Reinhart and Rogoff (2009), GDP per capita from Total Economy Database, Conference Board.

 

I have long been a fan of Reinhart & Rogoff‘s work on credit crises, going back to their December 2007 paper on major deleveraging cycles (5 Historical Economic Crises and the U.S.). That very much influenced my thinking not only in advance of the crisis hitting, but in what we should expect afterwards. Writing in advance of the crisis and recovery, R&R turned out to be more correct than anyone else covering the space.

Apparently, one of the downsides of writing THE seminal paper is watching it get bastardized for political purposes. The econ duo finally had enough of it, and published a Harvard PDF and Bloomberg column correcting the misinterpretations:

Five years after the onset of the 2007 subprime financial crisis, U.S. gross domestic product per capita remains below its initial level. Unemployment, though down from its peak, is still about 8 percent. Rather than the V- shaped recovery that is typical of most postwar recessions, this one has exhibited slow and halting growth.

This disappointing performance shouldn’t be surprising. We have presented evidence that recessions associated with systemic banking crises tend to be deep and protracted and that this pattern is evident across both history and countries. Subsequent academic research using different approaches and samples has found similar results.

What makes it particularly interesting is that these two academics decided to name names: They cited “including Kevin Hassett, Glenn Hubbard and John Taylor. Its not a coincidence that they are advisers to presidential challenger, Mitt Romney.

As an outside observer, I cannot tell if Hassett, Hubbard and Taylor are serious in what they write or merely posturing (Hassett, author of Dow 36,000, has proven himself such an enormous money loser, he is quarantined). But Hubbard and Taylor are potential CEA Chair and Fed Chair respectively, and are worthy of paying attention to.

I care much less about the presidential politics than I do the next administration’s policies.If these two gentlemen have a fundamental misunderstanding of the nature of the crisis and recovery — something that Obama’s econ team similarly suffered from — it does not bode well at all.

As the chart above (and at their paper) make clear, systemic crises and their subsequent recoveries are very different than typical balance sheet recessions. R&R named names because they disliked the way their work was being misinterpreted and misused for partisan reasons. I also suspect they are concerned that these errors may be the basis of subsequent policy decisions.

Let’s hope that whoever wins the election in November, shifts towards a reality based economics policy, rather than one based on erroneous interpretations and wishful thinking.

 

 

Previously:
5 Historical Economic Crises and the U.S. (February 9th, 2008)

Wall Street analysts and economists have this recession recovery wrong
Washington Post, July 15, 2011
http://www.washingtonpost.com/business/wall-street-analysts-and-economists-have-this-recession-recovery-wrong/2011/07/14/gIQAVRTIGI_story.html

Sources:
This Time is Different, Again? The United States Five Years after the Onset of Subprime
Carmen M. Reinhart and Kenneth S. Rogoff
Harvard University, October 14, 2012
http://www.economics.harvard.edu/faculty/rogoff/files/Is_US_Different_RR.pdf

Sorry, U.S. Recoveries Really Aren’t Different
Carmen M. Reinhart and Kenneth S. Rogoff
Bloomberg, Oct 15, 2012 6:30 PM ET
http://www.bloomberg.com/news/2012-10-15/sorry-u-s-recoveries-really-aren-t-different.html

Category: Data Analysis, Politics, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Reinhart & Rogoff Explain Everything . . .”

  1. [...] Reinhart & Rogoff return and gently correct political hacks who misunderstand their work.  (TBP) [...]

  2. Orange14 says:

    I’ve probably read more books on the financial meltdown than I should (mental health is a precious commodity) and had yet another one arrive from Amazon yesterday. The Reinhart and Rogoff paper is welcome but it’s not much different from what they have been saying over the past 12 months as the usual Mitt-Boys have sought to take their name in vain. The fact that Taylor, Hubbard, and Mankiw have not apologized to the American public for their complicit role in policy decisions with Bush-2 and continue to shill fro the Mittster speaks volumes to me. Anyone who thinks that Economics is a ‘science’ only need look at some of the work that they have done for the campaign. As for Hassett, nothing needs to be said other than ‘Dow 36,000′

  3. AHodge says:

    brilliant. and so clean i could read it in 10 mins

    their named critics have had polite rhetorical home surgery performed on them.
    all theory is abstraction
    their goal was to find common persistent elements over the centuries
    and there they are,
    their view can be consistent with extra new flaws in the modern system, that
    1 derivatives and complex product and garbage valuations
    2 modern fake financial ” insurance”
    3 the asset backed securitization cycle and stalled recovery

    were the particular and fixable parts of the last financial bubble

    While these two and Dalio are heroes of mine, the premier financial cycle theorists now eclipsing soros
    though all still building on Minsky 101
    they still simplify to say these are just modern versions of a centuries old cycle of bank lending and financial asset and collateral overvaluations and bursts
    in some ways that may be true, but
    diagnostically
    i submit it would help going forward if it was understood in modern detail,
    why the last one happened and why no one wants to buy securitized products now?
    we havent even recognised and taken the losses yet?

  4. AHodge says:

    it may also turn out that the nearly stalled US Europe recovery
    which is compleely inadquate
    is not strictly due to Rogoff malaise and and its expected 5 -7 year sluggishness
    if this turns into a completely premature new global recession
    way before any new financial or real cycle peak?
    even these three will have to go back and refurmulate.

  5. Ted Kavadas says:

    RE: “As the chart above (and at their paper) make clear, systemic crises and their subsequent recoveries are very different than typical balance sheet recessions.”

    While I believe that Reinhart & Rogoff’s work is valuable, I think the points made by Bordo, Taylor, etc. with regard to the relevancy, or lack thereof, of Reinhart & Rogoff’s inclusion of other countries’ data is well-founded.

    Also, I believe that the interpretation of Reinhart & Rogoff’s work needs to be performed with caution, for a variety of reasons. In particular, I don’t believe that today’s economic situation is similar to those previously encountered. I explain this further in my blog post below, for those interested:

    http://economicgreenfield.blogspot.com/2011/06/reinhart-rogoff-book-general-comments.html

  6. cognos says:

    Yeah… its a systematic banking crisis… like the early 1990s S&L thing.

    Resolving in much the same way.

  7. Orange14 says:

    @Cognos – S&L crisis actually started a decade earlier than you note.

  8. A says:

    Shrewd politicians fully understand voter behavior:
    - an ignorant public is far easier to govern…and manipulate.

  9. DeDude says:

    It’s the unemployment stupid, because the economic growth is driven by consumer spending. We had a decade of increasing consumer spending by inflating house prices – and having people take out and spend the “equity” created. That way the consumer class could spend and drive up GDP even though their real income had stagnated. That party has come to an end and instead of fake income to help grow the economy, consumers have real debt that needs to be paid back before they can use their income on non-essential spending. Anybody who is surprised that the economy has not done a quick V-shaped recovery is clueless. Anybody who has a plan for quick recovery needs to explain how their plan will quickly increase the income and reduce the debt of the consumer class. Remember we have a loss of $1 trillion per year of GDP for every 10 million people wanting full time jobs but unable to find work. A real jobs bill would go a long way towards accelerating our exit from the current slump.

  10. lalaland says:

    Since you had just. named. the 3 Romney advisers as the 3 called out by R&R as the primary sources of misinformation/wrongness, I’ll take this sentence to be sarcasm:

    “Let’s hope that whoever wins the election in November, shifts towards a reality based economics policy, rather than one based on erroneous interpretations and wishful thinking.”

  11. I was sincere — that wasn’t sarcasm, but given their history, its understandably interpreted as much

  12. AHodge says:

    this time is also different–beyond the prior three points
    in the extent of the bailouts rather than loss taking
    whike this can still be fit into their mold of eventually do the writedown you need–cycle delayed
    it is different this time to all other debt crises.
    with government guaranteeing/ assuming bad debts and the interest service that comes with them
    they have left the system with way too much unproductive unwarranted interest service
    and vulnerable
    if US interest rates double
    net interest goes from 11% of GDP to 22% of GDP
    for coupon clippers who will keep a lot of that and not spend it

    all four of these points of course argue for different and worse than RR
    not different and better like the planet R losers they skewer

  13. AHodge says:

    this time is also different–beyond the prior three points
    in the extent of the bailouts rather than loss taking
    whike this can still be fit into their mold of eventually do the writedown you need–cycle delayed
    it is different this time to all other debt crises.
    with government guaranteeing/ assuming bad debts and the interest service that comes with them
    they have left the system with way too much unproductive unwarranted interest service
    and vulnerable
    if US interest rates double
    net interest goes from 11% of GDP to 22% of GDP
    for coupon clippers who will keep a lot of that and not spend it

    all four of these points of course argue for different and worse than RR
    not different and better like the planet R losers they skewer

  14. b_thunder says:

    “If these two gentlemen have a fundamental misunderstanding of the nature of the crisis and recovery ” – I’m sure Mankiw, Hubbard and Taylor fundamentally know what’s going on. The problem is that 90% the country doesn’t, and by waving their Ph.D. “street cred” their job is to make the 90% accept the narrative and ideology of their presidential candidate.

    I’m not an economist, but I’m sure the principle most commonly stated as “follow the money” applies here. You don’t get paid for acknowledging the crisis and prescribing the right solutions. You get the big bullsh*t consulting fees from the Koch industries-run think-tanks (or from hedge funds – see Larry Summers) for enabling 0.01% come out from the crisis ahead of everyone else.

    And if you’re lucky enough and ride the wave of economic boom as in 1980s and late 1990s – you (and your ideology) become the “hero of the right,” the legend, the next “Maestro”

  15. AHodge says:

    in this area it will basically be a racethe next 3-4 years to see
    if the combination of
    financial repression–penalizing debtholders with suppressed rates(thank you Rogoff)
    reflation
    and remaining writedowns (thank you Dalio for the list of three)
    can be done before there is an unavoidable general rate rise

    if US net debt all of it including private. as reported in flow of funds
    is still over say 300% when that happens–watch out!

  16. Disinfectant says:

    John Taylor established quite clearly back in 2009 that he is incompetent and inconsistent. Felix Salmon broke it down for us:

    http://blogs.reuters.com/felix-salmon/2009/05/27/john-taylors-disingenuousness/

    Like many other hyperinflation asshats, he didn’t understand the role of money velocity and if he had been a policymaker, he would have advocated crushing the global economy with deflation to counteract the non-existent inflation threat. It’s astonishing that someone with his background could be so clueless, but these are the unfortunate facts.

  17. RW says:

    As Jonathan Chait makes clear, there is little doubt what economic and budgetary policy a Romney administration would likely pursue: The Ryan budget on steroids and implemented fast through reconciliation to prevent filibuster; done and done within the first six months of a Romney presidency.

    More generally there may be some chance that either a Romney or Obama administration would do what the economic mainstream recommends but, if so, it will probably only be at the margins at best. As Alan Blinder wrote some years ago, we do not seem able to evade certain political laws of economics:

    Murphy’s Law of Economics: “Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.

    O’Connor’s Corollary: “When conflicting economic advice is offered, only the worst will be taken.

    Reagan’s (and the Bush II Republican’s) general acceptance of Arthur Laffer’s crank version of supply-sidism was as predictable as the acceptance of crank austerianism by Romney/Ryan and, just as Mankiw could not influence Bush when tax-cut fever hit its zenith, neither will he or any other note of sanity prevent a Romney administration from pursuing the plutocrat’s war to its crashing finale; these boys are on a mission from God.

  18. pintelho says:

    The sad truth is that your hope is well…wishful thinking. no matter who wins…the children in DC will still espouse fantasy theories and the fairy economists that back them.

  19. Gary says:

    Richard Field takes a different view of the R&R analysis, asking why they did not look at the policy responses to each crisis as the results from Sweden and Iceland are instrumental in that regard. Moreover, he takes issue with the lumping of Iceland with other countries as it dilutes timing and depth of their recovery having adopted the Swedish model for handling the crisis.

    http://www.tyillc.blogspot.com/2012/10/sorry-it-is-economic-recoveries-from.html

    Barry, you’ve mentioned in the past that banks should have taken the losses. Yet, R&R do not take this policy response into consideration. I believe it lessens the importance of their work.

  20. [...] Wonks Reinhart and Rogoff would like people to stop misusing their work – Barry Ritholtz [...]

  21. HarleyHoward says:

    Orange 14
    You are an idiot. Listen! Reinhart and Rogoff are reiterating a truism. This time is NOT different! The government printing money to buy it’s own debt will debase the currency to the point of making it worthless. Once the financial elites realize the emperor has no clothes, they will refuse to buy those clothes. Hope you can comprehend.

  22. philipat says:

    I am inclined to belive in the facts, which R&R present in an informative and consistent way. It is a shame, then, that The O team don’t use the R&R data more convincingly. Perhaps they believe that the US electorate is “Too stupid to understand”?. If that were the case it really seems hopeless.

    As a non-US citizen, I can see very little difference between the two parties and find it difficult to see how it has come to this.

    “A curse on both your houses” (Quoting Shakespeare out of context); in either sense.