Reprinted from The Wall Street Journal blog: Real Time Economics by Jon Hilsenrath
August 27, 2010, 10:30 AM ET – Economists Vincent and Carmen Reinhart offer a grim tour of the economic landscape after financial crises — one plagued by slow economic growth and high unemployment — in the kickoff paper up for discussion at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole.
“GDP growth and housing prices are significantly lower and unemployment significantly higher in the ten-year window following the crisis when compared to the decade that preceded it,” the authors conclude. They look at fifteen post-World War II financial crises in advanced and emerging economies and the three global crises that occurred in the 1930s, the 1970s and the latest financial crisis.
The work builds on research Ms. Reinhart has conducted with Harvard University professor Kenneth Rogoff on the causes and consequences of centuries of financial shocks. The latest piece looks at the long-haul after the shock occurs.
In ten of the 15 cases they looked at, unemployment never returned to its pre-crisis low in the 10-year window after the crisis occurred. In many cases, unemployment has never gotten back to where it was. One example: The unemployment rate in Japan hit a low of 2.1% before its stock market and housing sector busted in 1992. It has not gotten lower then 3.8% since then. Sweden had an unemployment rate of 1.7% before its 1991 crisis; it’s never gotten lower than 3.8% since then. The U.S. unemployment rate hit a low of 4.4% in 2007 and hit 3.9% in 2000, before the tech bubble burst sank the economy.
Moreover, growth in gross domestic product, or GDP, which is a nation’s total output of goods and services, tends to be 1% point slower in the decade after a crisis than it was in the decade before, they say. That means it is hard during these periods for the economy to make up lost ground.
“There is little good news to be found in the result that income growth tends to slow and unemployment remains elevated for a very long time after a severe shock,” the authors say. Policy makers often make matters worse by making policy mistakes in an attempt to get unemployment back to its pre-crisis level. In past crises, they find, “political leaders sometimes grasp for quick fixes that impair, not improve, the situation.”
Ms. Reinhart is a professor at the University of Maryland and former International Monetary Fund economist. Her husband, Mr. Reinhart, is the former head of the Fed’s monetary affairs department and currently a scholar at the American Enterprise Institute.
Source: Wall Street Journal