September 9, 2013, 9:11 am
Dean Baker weighs in on the self-correcting economy discussion — it’s not really a debate — and expresses some skepticism about whether we can expect a recovery even in the Keynesian long run. Fair enough. But a quibble: Dean seems to think that I’m saying that 2008 was unique and completely unlike previous recessions. Actually that was never my view — and my actual view ties in with some of the arguments David Warsh makes in his attack on Larry Summers.
Start with Warsh: he asserts, among other things, that the unfortunate “Romer-Bernstein” forecast of a V-shaped recovery was actually the Summers forecast; he also asserts, however, that nobody knew that we should expect a protracted era of economic weakness until Reinhart and Rogoff came along with their analysis of the aftermath of financial crises.
Well, I agree that the R&R work here was excellent and hugely informative — why oh why did they have to follow up with that debt paper? — but we didn’t need that work to know that a V-shaped recovery was unlikely. It was already clear, if you were paying attention, that the nature of the business cycle had changed.
A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.
Since the mid 1980s, however, we’ve had the “Great Moderation,” with inflation quiescent. Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand.
And while they haven’t been as deep as the older type of recession, they’ve proved hard to end (not officially, but in terms of employment), precisely because housing — which is the main thing that responds to monetary policy — has to rise above normal levels rather than recover from an interest-imposed slump.
That’s from early 2008, before we had any idea just how bad it was going to be, but it was already obvious to me then that V-shaped recovery was not in the cards, precisely because prolonged jobless recoveries had already, pre-2008, become the new normal. I was still too optimistic about the length of the slump, but remember, this was seven months before Lehman fell.
So I didn’t mean to imply that 2008 was completely sui generis; on the contrary, it simply represented a stronger form of a pattern that was already apparent from 2001 and before that in 1990-91.
Why, then, did the White House predict V-shaped recovery? I don’t know. I will say, however, that a lot of business economists were still thinking that a deep recession means a fast recovery, essentially because they weren’t thinking about the changing nature of slumps. And maybe that view infiltrated Treasury, in particular.