Are We Getting the Economic Recovery We Deserve?

  • Share
  • Read Later
Spencer Platt / Getty Images

A child walks down a street in Camden, N.J., on October 11, 2012. According to the U.S. Census Bureau, Camden is now the most impoverished city in the United States with nearly 32,000 of Camden's residents living below the poverty line and an unemployment rate estimated at 19 percent.

During this presidential election cycle, economics and politics are inseparable. The fundamental question voters will have to decide upon when making their choice for President in a few short weeks is whether they believe that the weak recovery we have been experiencing is due to poor economic policies put forth by President Obama or unavoidable circumstance. While polls have consistently shown that voters lay blame for the financial crisis at the feet of President Bush, it is unclear whether they blame President Obama for the weak recovery that followed.

Politically, it’s a tough case to make that 7.8% unemployment, and a per-capita GDP that is still below it’s 2007 peak, is about as good as we could have expected at this point. But the President does have some rigorous economic research to back up such a claim. In 2009, economists Kenneth Rogoff and Carmen Reinhart published a book based on years of research leading up to and during the crisis, called This Time is Different, which argued that contractions caused by financial crises are more painful and take longer to emerge from than normal recessions. These economists accurately predicted the financial crisis months before it happened, and their research – which studies financial crises around the world as far back as the Florentine banking crisis of 1340 – also predicted that we would experience a distressingly slow recovery.

(MORE: Spring Slowdown: Is the U.S. Economic Recovery Stalling?)

The reason why recessions triggered by financial crises are so difficult to work through is that these downturns occur after debt-fueled bubbles have burst, when governments, corporations, and households are not only left with large amounts of debt, but also declining income with which to pay it off. And this is exactly what we’ve seen so far in this latest crisis.

But in recent weeks, several conservative economists — some of whom are associated with the Mitt Romney campaign — have emerged to challenge this prevailing theory that systemic financial crises somehow consign us to years of stagnant economic growth. These economists, including John Taylor, Kevin Hasset, and Glenn Hubbard, point to a recent study by Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland, which argues that recessions followed by financial crises actually tend to lead to strong recoveries. According to an op-ed in the Wall Street Journal by Mr. Bordo:

“We found that recessions that were tied to financial crises and were 1% deeper than average have historically led to growth that is 1.5% stronger than average . . .By contrast, the Reinhart/Rogoff analysis focuses on how long it takes the economy to return to its precrisis output level. Since contractions related to financial crises are generally deeper and longer than other recessions, they are followed by recoveries that take longer than normal to see output return: Since 1887, the growth of real GDP over both the recession and the recovery was 1.2% in recessions with financial crises and 2.2% in those without. But that says little about how fast the economy grows once the recovery starts. As we found, since the 1880s, the average annual growth rate of real GDP during recoveries from financial-crisis recessions was 8%, while the growth rate from nonfinancial-crisis recessions was 6.9%.”

The main point of difference between these studies is that Reinhardt and Rogoff are measuring the years it takes – once a recession begins – to regain peak per-capita GDP as well as peak employment. And by this measure, the U.S. is actually fairing better than previous crises. But what Bordo and Haubrich are measuring is the rate of recovery, in terms of GDP growth, once the recovery has begun. And by this measure, the 2007 crisis is indeed a laggard compared to financial-crisis-induced recessions.

(MORE: America’s Slow Economic Recovery)

But this seems to me a trivial observation, for the simple reason that the 2007 recession has been much less severe than others that followed banking crises, like 1929, 1907, or 1893. If your recession isn’t as severe in it’s downturn, the recovery won’t be as robust on the way back up. This is because an economic recovery is just what it sounds like: growth that returns an economy back to its long-run trajectory. As Reinhardt and Rogoff write in a recent Bloomberg op-ed, “An 8 percent decline followed by an 8 percent increase doesn’t bring the economy back to its starting point.”

This is such an obvious distinction, that economists who trumpet Bordo and Hubrich’s paper as evidence that the current administration’s policies aren’t working appear to be purposefully muddying the waters of accepted economic theory. This is the line that Paul Krugman took in the New York Times on Monday:

“Look, economics isn’t as much of a science as we’d like. But when there’s overwhelming evidence for an economic proposition — as there is for the proposition that financial-crisis recessions are different — we have the right to expect politicians and their advisers to respect that evidence. Otherwise, they’ll end up making policy based on fantasies rather than grappling with reality.”

Now, Paul Krugman isn’t the best advocate out there for keeping politics and economics separate, but I think his point should be heeded. It is clear that conservative economists on the Romney payroll are trying to dismantle an idea that the available evidence clearly supports — that it takes a long time for a nation to recover from financial crises. Take an August op-ed by Romney-advisors Kevin Hassett and Glen Hubbard in The Washington Post, for instance:

“Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland concluded after an extensive study of recessions in the United States that, contrary to the findings of Reinhart and Rogoff, recessions stemming from financial crises in the United States tended to be followed by faster recoveries. Bordo and Haubrich point out that the 2007-09 recession is actually a negative outlier.”

That quote makes it seem that the Bordo and Haubrich study argues that prior to 2007, America has recovered (reached pre-crisis economic conditions) from banking-crisis-led recessions in a shorter time period. And that is plainly not true. But these two economists aren’t trying to further the general public’s understanding of important economic issues. They are, rather, using their academic reputations to achieve political ends.

(MORE: Are We Already in A Recession?)

Not that there aren’t plenty of valid critiques of the administration’s economic policy to make. In the same piece, Hubbard and Hassett argue that it was clear that the Obama administration did not understand the nature of economic crisis we faced in 2008:

“The administration’s previous policies are questionable if one accepts that Reinhart and Rogoff are correct and that we are destined for a protracted recovery . . . If the Obama administration believes that the Reinhart and Rogoff analysis is correct, then the White House should concede that it was mistaken when it proposed a stimulus that would boost growth for only a short time, and it should stop calling for marginal hikes in tax rates.”

Of course, this is a completely different argument, and one that the available evidence suggests is more credible. The administration did misinterpret the extent of the crisis. And mainstream economic theory would suggest that cutting any spending or raising any taxes would not be a good idea in the short term. But this isn’t the path that the Romney economic team is advocating either. And its much easier to argue that your opponent has screwed up what would otherwise have been a robust recovery than to admit that we are likely to face more years of slow growth and frustratingly high unemployment, regardless of who wins the presidency.

MORE: Why Aren’t There More Jobs?


Bush caused it, and President Obama did absolutely the best he could given that the Republicans opposed him at every turn whether it was good for the country or the people of the United States or not.

The Republicans have consistently proved they do not care one whit for the people of the United States, but given the opportunity will sacrifice them to their Corporate buddies at the earliest opportunity.


Of course we are.  We elected the course, we chose.  Look at the fools we elected and the buffoons on this thread.  All they can do is blame someone else for their misery.  The fact is, they're just parasites who detest the light of day and feed on government sh!t.  God bless Barry Obama.  On the other hand, who is capable of blessing a god?


US is not a country look after their ordinary citizens,their politicians are working for special group and hidden agenda.Look at the way US deal with the Chinese trade compare to what the Germany done,you see the differences ?That is why Germany on top and US is not done so well.


Religious Republican zombies are coming out of the woodwork -- descending on America! Scary or what?Romney; would be the equivalent to the Taliban -- in his treatment to women and the gay community -- with his extreme cultist attitude … if ever elected!Religion; is the biggest bully on the block!IRS codes prohibit churches from endorsing or opposing political candidates!The IRS … should immediately tax churches -- that break that rule!Churches -- are opposing gay rights -- based on a cult! Tax them or shut them down!Roman Catholic; Baptist & Mormon churches who were involved in Proposition 8; against the gay community – should be shut down immediately and/or have their tax exemption status revoked!Church manses; mansions; corporate jets and Christian college campuses … should face taxes or be shut down -- based on corruption and/or being involved in cultism!Mormons are nothing more than homophobic bigots and lustful religious lunatics; who harvested women … attempting to scrutinize themselves; into eternity – without success!Romney as President; would mean the darkest & meanest period in the United States of America’s history. Homophobic -- witchcraft would rule the government from Rome & Salt Lake City …!


This global financial downturn is all attributable to the one and only; Ben Bernanke … appointed by Bush! He wanted to slow down the buoyant economy while learning on the job -- and it cost the world economy upwards of $6 Trillion.


@MacdonaldBank I'm no economist but it seems to me Bernanke is following an expansionist policy, not trying to slow things down.


What apparently isn't being considered here (perhaps even for - GOP - electoral reasons) is the European structural debt crisis, which certainly made this recession so much worse, as the world economy nowadays is more entwined than ever. In this perspective, its surprising to see any recovery at all, since European economists are predicting a recovery period of two more years, at least.


I think the fact that Congress is continually blocking every Presidential economic initiative because of dug in ideological position does not create the kind of environment where people feel safe about opening their checkbooks in business or in personal finance. This impasse is doing great damage to the country and they should stop it. This is not the time to dig in ones heels to follow and ideology. We need cooperation from both branches and practical solutions, and stop trying to win elections on the backs of people who need to work.

alaska3636 1 Like

"...muddying the waters of accepted economic theory"

Accepted by whom?  Economics is a soft science and thus widely varying in interpretation by which economic facts (literally an infinite number of variables) are chosen and what result is meant to be arrived at (the whole marriage of politics and economics thing.)

Before Galileo (Copernicus? My history is muddy), the accepted theory was that the Earth was flat and the universe revolved around it.  It's mindless statements like this and there implicit assumptions that retard the growth of knowledge.  Thanks for nothing.

"...these downturns occur after debt-fueled bubbles have burst..."

While I'm at it, why not mention that utterly nonsense position of Austrian economics which explains (and thus predicted years in advance) how loose monetary policy distorts the pricing mechanism and induces widespread investment where there is no real investment capital to back it up.  Or is that too muddy for you...

akpat 1 Like

Unlike many other recessionary periods the US economy is moving from one based on manufacturing to one based on service industries. Because of this those jobs which are available pay a lot less and consequently family budgets have to reflect that.