Rutgers University economic historian Michael Bordo and Cleveland Fed economist Joseph Haubrich studied just U.S. recessions going back to 1882 and found that U.S. recoveries following financial shocks tend to be rapid. Top economic advisers to Republican Mitt Romney have leaned on this research to argue that the culprit in the current slow recovery is Mr. Obama himself, not the financial crisis that preceded him. This line of research has taken issue with the Reinhart and Rogoff studies, arguing, among other things, that U.S. crises can’t be likened to financial crises that have happened elsewhere in the world — such as small developing markets – because their economic institutions are so different.
Now Reinhart and Rogoff are firing back. In a short paper they released this weekend, they fire back at the Bordo work. They see several flaws. One of their main arguments is that the Bordo work includes borderline financial shocks which weren’t full blown crises. Reinhart and Rogoff argue that if the paper focused on the four full blown U.S. crises of the past 150 years – in 1873, 1893, 1907 and the 1930s – they would get results similar to the broad swath of international crises the Harvard professors examined.
“The most recent US crisis appears to fit the more general pattern” they conclude, “The recovery process from severe financial crisis is more protracted than from a normal recession or from milder forms of financial distress.”
As argued in my earlier post, I favor a monetary explanation for the speed of the recovery. In this post I use the same strategy, only now I consider both the ‘downturn’ and the ‘upturn’ focusing only on the ‘four full blown U.S. crises’ identified by Reinhart and Rogoff: 1873, 1893, 1907 and 1930s. I start with the year real output peaked and end two years after the through year. The full periods are: 1873 – 1881, 1893 – 1896, 1907 – 1910 and 1929 – 1935.
What the charts show is that both the depth of the downturn and the swiftness of the upturn are related to what happens to nominal spending (NGDP). The 1907 – 1910 period is striking example. Note also that the 1873 – 1881 episode is very peculiar. Although NGDP dropped somewhat, there was never any drop in real output (a very ‘queer’ severe financial crisis). And when nominal spending takes off real output booms and by 1881 is almost 60% above its 1873 level!
The ongoing cycle clearly shows that more than the financial crisis from the burst of the housing bubble, what happens to nominal spending is what really matters. On yearly data, NGDP in 2008 is still above the 2007 level, so that despite the financial crisis, real output is supported. Things only go bad after nominal spending drops.
But the game of attributing responsibility to the president for the relatively weak recovery is misplaced. It´s the Fed´s fault (what Scott Sumner recently called “Fed Incompetence” ). Maybe Obama´s failure to fill up vacant Board seats for a long time had some effect, but surely that´s of second order importance.