Bankers Told Recovery May Be Slow
JACKSON HOLE, Wyo. — The American economy could experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed, according to an authority on the history of financial crises.
That finding, contained in a new paper by Carmen M. Reinhart, an economist at the University of Maryland, generated considerable debate during an annual policy symposium here, organized by the Federal Reserve Bank of Kansas City, which concluded on Saturday.
The gathering, at a historic lodge in Grand Teton National Park, brought together about 110 central bankers and economists, including most of the Federal Reserve’s top officials. In 2008, the symposium occurred weeks before the Lehman Brothers bankruptcy nearly shut down the financial markets. At the symposium last year, officials congratulated themselves on weathering the worst of the crisis.
But the recent slowing of the recovery cast a pall on this year’s gathering. As economists (some wearing jeans and cowboy boots) conferred on a terrace with a sweeping view of the 13,770-foot peak of Mount Teton, or watched a horse trainer tame an unruly colt at a nearby ranch, they anxiously discussed research like Ms. Reinhart’s. (Participants pay to attend the event, which is not financed by taxpayers, a Kansas City Fed spokeswoman emphasized.)
“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”
Ms. Reinhart’s paper drew upon research she conducted with the Harvard economist Kenneth S. Rogoff for their book “This Time Is Different: Eight Centuries of Financial Folly,” published last year by Princeton University Press. Her husband, Vincent R. Reinhart, a former director of monetary affairs at the Fed, was the co-author of the paper.
The Reinharts examined 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market.
In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.
“Large destabilizing events, such as those analyzed here, evidently produce changes in the performance of key macroeconomic indicators over the longer term, well after the upheaval of the crisis is over,” Ms. Reinhart wrote.
Ms. Reinhart added that officials may err in failing to recognize changed economic circumstances. “Misperceptions can be costly when made by fiscal authorities who overestimate revenue prospects and central bankers who attempt to restore employment to an unattainably high level,” she warned.
Several scholars here cautioned that it was premature to infer long-term economic woes for the United States from the aftermath of past crises.
The Reinharts’ research “has not yet tried to assess the extent to which different policy stances mitigated the length of the outcome,” said Susan M. Collins, an economist and the dean of the Gerald R. Ford School of Public Policy at the University of Michigan. “But the reality is that we need to have an understanding that the issues we are dealing with are severe, and that we should not expect them to be unwound in a few months.”
Ms. Collins added: “I’m very much a glass-half-full person. What we’ve seen in the past few years has been a policy success. Things are not where we want them to be, but they could have been a lot worse.”
The Reinharts’ paper was not the only one to offer somber implications for policy makers.
Two economists, James H. Stock of Harvard and Mark W. Watson of Princeton, presented a paper arguing that inflation, which has already fallen so much that some Fed officials fear the economy is at risk of deflation, a cycle of falling prices and wages, could fall even further by the middle of next year.
Inflation has been running well below the Fed’s unofficial target of about 1.5 percent to 2 percent. Ben S. Bernanke, the Fed chairman, reiterated on Friday that the central bank would “strongly resist deviations from price stability in the downward directions.”
Mr. Stock and Mr. Watson noted that recessions in the United States were associated with declines in inflation, with an exception being an increase in inflation in 2004, which occurred despite a “jobless recovery” from the 2001 recession. The authors said they could not explain the anomaly but also could not “offer a reason why it might happen again.”
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