Economics

Why Geithner is wrong to blame the weak recovery on the financial crisis

Don’t blame Obama for the weak economic recovery, blame the financial crisis. That was the message Thursday from U.S. Treasury Secretary Timothy Geithner (via Reuters):

The U.S. economy is growing again but faces tough challenges that call for action to create jobs and foster expansion, U.S. Treasury Secretary Timothy Geithner said on Thursday. … He noted that research shows that recoveries that follow financial crises tended to be “more tentative and uneven,” and said it likely will take years to fully repair damage caused by the last one.

Nice try. Maybe Geithner should double check with Team Bernanke about that claim. Here is a Fed study from November:

This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions.

So not only are recoveries after financial crises not “more tentative and uneven,” recoveries after deeper recessions tend to be faster! Let’s look at the Obama recovery:

– The past three years have seen the longest stretch of high unemployment in this country since the Great Depression.

– In the first ten quarters of the Obama Recovery, real GDP is up a total of 6 percent vs. 16 percent in the Reagan Recovery after the Long Recession of 1980-82.

– After 10 quarters of recovery, the Reagan growth rate was 6 percent vs. Obama’s 2.4 percent vs. 4.6 percent for the average post-World War II expansion.

– In the 32 months of the OR, the economy added 2 million net nonfarm payrolls vs. 9 million during the RR.

Now, the study does go on to say that housing declines can be a drag on growth. But I recently wrote why you can’t blame the housing collapse entirely for the anemic recovery. Not even close.

And that is an awfully passive way of looking at things, anyway. Better policy would have produced a better recovery, both broadly and in housing. Likewise, I think bad policy out of Washington made the recovery weaker. I urge everyone to take a look at Money Well Spent? The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History by Michael Grabell, a reporter for ProPublica. It documents the many failings of the American Recovery and Reinvestment Act. Grabell notes that Vice President Joe Biden said the stimulus would “literally drop kick us out of the recession.” But Grabell concludes that “the stimulus ultimately failed to do what America expected it to do — bring about a strong, sustainable recovery. The drop kick was shanked.”

One thought on “Why Geithner is wrong to blame the weak recovery on the financial crisis

  1. The conventional wisdom, I think due to the influence of the Rogoff-Reinhart book, seems to be that the recovery from this recession is slower than, say, the 1980-1982 recession due largely to the NATURE of this recession–it’s deep connection to the banking crisis and the specific difficulties of an overleveraged global economy (i.e., http://www.project-syndicate.org/commentary/the-second-great-contraction). The Fed study appears to contradict Rogoff in an important and fundamental way–is that what we should take away from this?

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