In his latest column, Paul Krugman draws attention to a quarrel about the pace of the current recovery. We have Carmen Reinhart and Ken Rogoff on one side and John Taylor and Michael Bordo on the other. It's pretty heated, given that it's about so little. Let's start with the points they agree on:
- Recessions associated with systemic financial crises tend to be unusually prolonged and severe.
- The US experience since 2008 is an instance of 1.
- Right now, the US economy could and should be growing faster than it is.
It's a shame they aren't arguing about 3--not about whether the US economy could be made to grow faster (on which point, as I say, they agree) but about how to make it grow faster. Instead they are arguing mainly about the meaning of the word "recovery".
Bordo and Haubrich find that an old rule of thumb generally holds true: The deeper the recession, the stronger the recovery--even if the recession is linked to a financial crisis. The slow pace of this recovery is therefore an anomaly, not explained by the mere fact that a financial crisis was involved. They agree, though, that a financial crisis tends to mean a deeper and more prolonged downturn, so the recovery has more lost ground to make up.
Reinhart and Rogoff say that recovery from a financial-crisis recession is slower than recovery from the usual kind, thus seeming to disagree with Bordo et al--but they mean something different by "recovery". They date recovery not from the trough of output, like Bordo et al, but from the previous peak, asking how long it takes the economy to get back to where it started. The two sides are asking different questions. Bordo and Haubrich aren't challenging Reinhart and Rogoff's finding about the depth and duration of financial-crisis recessions; and Reinhart and Rogoff aren't addressing Bordo and Haubrich's point about the pace of recovery measured from the trough. Both sides could perfectly well be right.
I'll need some convincing that Bordo and Haubrich are right, because it's easy to think of reasons why a financial-crisis recession would be followed by a slower than normal recovery (measured from the trough). However, the strength of recoveries (measured from the trough) does happen to be the issue Bordo and Haubrich directly investigate, unlike Reinhart and Rogoff, who are concerned with the properties of the recession and recovery viewed as a single episode. Reinhart and Rogoff have good reasons for looking at it that way--namely that it's difficult to date the trough, and the delay before you get back to the previous peak is arguably all that matters anyway. The fact remains, the two sides are talking past each other.
In contrast, the disagreement about how to accelerate the recovery is worth having. Rogoff, for instance, has said he thinks a bit more inflation would improve the recovery by reducing debt. Bordo, who's endorsed Romney, is presumably more interested in lowering taxes, cutting public spending, regulatory reform and the other items in the statement he signed to that effect. This would be a more fruitful discussion.
I don't know about you, but when confusion arises in disputes of this kind, I always turn to Krugman for dispassionate adjudication. His column attacks what he calls crisis denialism, and regrets the way politics is twisting economic analysis. In a blogpost on the same subject a few days ago he put it this way:
Call this another example of how politicization is hurting economics. The proposition that financial crises change macroeconomic outcomes is surely one of the big things we've learned in recent years. Yet here we have well-known economists refusing to listen and throwing out misleading studies, which just happen to be convenient politically.
That's so true. Thank heavens we have Krugman to lean against the trend, and go where the evidence takes him without partisan preference.
And I'm so pleased that, on Krugman's recommendation, we can welcome Reinhart and Rogoff back into the fold of competent professionals deserving of respect. Not long ago, he was drawing attention to the "best takedown yet" of Reinhart-Rogoff's work linking high levels of public debt lead to slower growth.
I think we can say that this paper has been completely discredited. I'm actually sort of shocked that R-R apparently failed even to notice that all of their high-debt observations for the US -- and remember, it was their own choice to highlight US data -- come from the years immediately after World War II, and to think about what that means.
Back then they fell into the category of people whose work wasn't just incorrect but so bad it was kind of shocking. (Something more sinister than ordinary incompetence was probably going on.) But now they've raised their game to the point where they can again be regarded as exemplary scholars establishing indisputable facts. Oddly enough, this is on the basis of a single body of work. The part of their research that argues for fiscal conservatism is suspiciously shoddy--driven by politics, in all likelihood--whereas the part that excuses slow growth under the Obama administration is entirely free of prejudice and upholds the highest standards of scholarship. I'd mistakenly taken them to be outstanding scholars all through. Without Krugman's remorselessly objective insight, this weird inconsistency is something I might have missed.
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