

What past financial crises tell us about the U.S. recovery.

We've spent a lot of time in this space bemoaning the sluggish economic recovery the United States has experienced for the last 4 1/2 years. Growth has been around 2 percent, give or take, quarter after quarter after quarter. For way too many ordinary Americans, it hasn't felt like a recovery at all.

But maybe what's out of whack isn't just the economy, but our expectations of what a recovery in the aftermath of a banking crisis.

Drawing on their exhaustive study of financial crises and their after-effects, Carmen Reinhart and Kenneth Rogoff explored just that question in a new paper, presented last weekend at the American Economic Association annual meeting and due to be formally published in May. (Reinhart-Rogoff were authors of a much-criticized paper linking slow growth to high public debt levels, but whatever one thinks of that, their work parsing the details of long-forgotten crises is essential for anybody who cares about economic history)

The short version of their conclusion: We're doing pretty well! Or at least, pretty well by the standards of countries emerging from banking crises.

Of 100 systemic banking crises in the United States and around the world, Reinhart and Rogoff found that it takes an average of eight years for per-capita GDP to fully recover. Of the 12 countries directly hit by the global financial crisis that began in 2007, the United States and Germany have both returned to their pre-crisis levels of per-capita GDP.

That doesn't mean everything is terrific. We haven't caught up to the pre-crisis growth trajectory, only to the 2007 level of per-capita GDP. It has still been a lost six years for growth. Moreover, in a longer-term pattern, growth in output isn't translating into higher incomes for middle and lower-income Americans the way it has historically, meaning that people aren't imagining it when they say they're worse off than they were in 2007.

But compared to the historical data set of 100 severe banking crises that Reinhart-Rogoff analyze, this one really wasn't so bad. In 43 percent of of them, there was a double-dip recession; the United States has escaped one. The typical post-World War II business cycles with which Americans have typically compared this recovery is thus an unfair comparison, they argue.

That all raises the question of "why". Why is it that it takes so long for nations to recover from financial crisis-induced recessions? In an intriguing but not well-developed set of concluding observations, Reinhart and Rogoff argue that it is because advanced nations do not consider the kinds of radical actions that might deal with the heart of their financial problems: Restructuring debts so as to reduce the overhang that holds back growth in highly indebted countries, allowing higher inflation to achieve the same result, introducing capital controls.

Those are all ideas that are worth thinking about. How might the U.S. economy look different right now if, for example, Congress had enacted far-reaching options for mortgage debt restructuring back in 2009, or the Federal Reserve had pursued (and achieved) 4 percent inflation over the last few years rather than sub-2 percent?

Those will have to remain theoretical counterfactuals. Because the biggest lesson of the Reinhart-Rogoff research is this: We may think we've learned a lot in the last few hundred years about to run an economy. But the global financial crisis showed us just how limited our knowledge really is.