Recovery could be one of longest, most difficult in U.S. history, economists say

In the rhetoric of the presidential campaign, the long-running economic woes of the United States can be cured with simple, quick remedies.

President Obama called this a “moment of challenge” and on Wednesday promised a jobs program. Texas Gov. Rick Perry said, “We’re going through difficult economic times for a purpose — to bring us back to those biblical principles of you don’t spend all the money.” And Republican candidate Michele Bachmann said this week that “it really isn’t that hard to turn the economy around.”

“All you have to do is prioritize spending,” she said.

But for a coterie of economists who have studied decades of downturns, the recovery from the most recent recession is likely to be one of the most difficult and protracted in U.S. history, simply because of the recession’s unusual nature.

If it follows the patterns of other similar crises, the recovery of the U.S. economy could take years, according to influential studies by economists Ken Rogoff and Carmen and Vincent Reinhart.

Their research, which is well known at both the White House and the Federal Reserve, likens the economic situation in the United States today to past crises in countries around the world. It finds, for example, that in those countries unemployment rates and housing prices did not return to pre-recession levels for a decade or more after the crisis.

“The first lesson is don’t expect miracles,” said Carmen Reinhart, an economist with the Peterson Institute for International Economics.

This dismal outlook rarely enters the political rhetoric, even though current and former U.S. economic officials have read and admired these studies. In part, this is because speechwriters favor optimism. And in part, this is because figures such as Fed chief Ben S. Bernanke and former Obama economic adviser Lawrence H. Summers have hoped that the right government action could avert the mistakes that delayed past recoveries.

But in recent weeks, the ratcheting downward of U.S. economic growth and the panic on Wall Street caught many by surprise, bringing extra attention to the bleaker forecasts from the economic historians.

“The Wall Street forecasters and the Fed forecasters had always viewed the recovery as right around the corner,” Rogoff said. “But it never came. The last couple of weeks has been the nail in the coffin of the view that we were going to see a normal recovery.”

Quick comebacks

Normally, recovery from a recession is at least as rapid as the decline that led to the downturn.

Of the 11 U.S. recessions after World War II and before the most recent downturn, all but one were followed by recoveries that were more rapid than the decline, according to research by economists Michael D. Bordo and Joseph Haubrich. In those instances, gross domestic product, a standard measure of the size of the economy, rose faster than it had fallen.

But because of the severity of this recession, and the accompanying crises hitting banks and other lenders, economists believe that recovering from it will be more difficult.

Rogoff has suggested that, because the phenomenon was so different from a typical downturn, the name “recession” doesn’t fit.

“Simply calling this a recession is like coming down with pneumonia and calling it a bad cold,” said Rogoff, a Harvard University economist. “It’s a completely different animal.”

Rogoff and the Reinharts base their conclusions on research into hundreds of economic downturns around the world, and the 2008 book by Rogoff and Carmen Reinhart, “This Time Is Different,” has caught the attention of some White House officials.

The economists looked, for example, at the severe financial crises that played out in five industrialized economies: Spain in 1977, Norway in 1987, Finland and Sweden in 1991, and Japan in 1992.

In each of those cases, unemployment rates remained above pre-crisis levels for at least 10 years, and in most cases, housing prices did not return to pre-crisis levels during that period.

One of the chief reasons countries have struggled to recover from economic downturns accompanied by severe financial crises, according to Reinhart and Rogoff, is that the downturn typically leaves behind large amounts of private and public debt.

For example, in the United States between 2000 and 2008, outstanding consumer credit and home mortgage debt rose rapidly, from 65 percent of gross domestic product to more than 90 percent.

The economy cannot fully heal until consumers and other debtors shed their financial burdens and are able to spend more freely again. Consumer credit has since fallen to 85 percent, but it could take many years for households to reduce what they owe.

“There is no silver bullet,” Reinhart said, though programs that would ease households out from under their debt burdens would help the recovery.

‘Very different’ situations

Although the work of the economic historians has received widespread praise and attention, some economists warned against using the experience of other countries and other crises to predict what will happen in the United States.

Summers, who called the Rogoff and Reinhart work “very informative,” noted that just like hurricanes, economic crises vary widely and can be difficult to compare.

“A situation like Japan, where the stock market fell to 15 percent of the previous level, is very different from the situation in the U.S., where the market fell dramatically but not nearly as much,” he said.

Moreover, he said, although economists within the administration recognized that recovery from this recession would be more difficult because a bubble had burst, they viewed that as a reason to be more aggressive in searching for ways to boost the economy through stimulus.

“This was a reason for activism, not fatalism,” he said.

Likewise, Bernanke said in April that he “enjoyed that book very much. . . . I thought it was informative,” and he noted that Rogoff was a classmate in graduate school. But he suggested that better moves from the government might have made those other economic recoveries more rapid.

“Another possible explanation for the slow recovery from financial crises [in the other cases] might be that policy responses were not adequate,” he said.

Other scholars have differed from Reinhart and Rogoff on exactly why this recession is different from most others.

In a forthcoming paper for the central banking conference at the Swiss National Bank, Bordo, a Rutgers professor, and Haubrich, of the Federal Reserve Bank of Cleveland, studied the record of business cycles in the United States going back to 1882.

Although others have blamed the tepid recovery on the financial crisis, Bordo and Haubrich focus most on the collapse of the housing market.

“This recession is the only one in U.S. history associated with a big housing bust nationwide,” Bordo said. “We think that is a key reason why the economy is so slow — residential construction, consumer durables, that whole sector is moribund. This is what is making this recovery look different from any other recovery in U.S. history.”

Peter Whoriskey is a staff writer for The Washington Post handling investigations of financial and economic topics. You can email him at peter.whoriskey@washpost.com.
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