Bob Moon: Our “Breakdown” economic coverage continues today with a look into our not-so-distant past. Our current economic troubles that began in 2008 have been compared quite frequently to the Depression of the 1930s. But how do they match up with more recent downturns?
Carmen Reinhart is a fellow at the Peterson Institute and co-author of the book “This Time is Different.” Welcome to the program.
Carmen Reinhart: Thank you.
Moon: Technically, I know we’re not in a recession, but a lot of people are still feeling like we are. What do you think?
Reinhart: We are in a prolonged slump; a period of subpar growth. Last year — literally to the day — Vincent Reinhart and I did a paper for the conference, the Federal Reserve conference, at Jackson Hole. That paper was called “After the Fall.” In that paper, we basically looked at the 10 years after severe financial crises, and the overall characterization of those 10 years is that growth is slower — about 1 percentage point slower — and unemployment is significantly higher. So that’s why we kind of feel we’re in a recession. We’re not in your run-of-the-mill business cycle.
Moon: And you know, this time what’s different, it seems to me, is it’s so hard to see the way out. So many of us are mired in debt, we have no way to make the extra money we’d need to change that. Am I wrong or are we more boxed in than ever?
Reinhart: No, you’re absolutely on the mark. In the boom period, a lot of debt is built up, and in this case, household debt. And that unwinding of those debts is not something that happens quickly.
Moon: This malaise, if you will, how is it different than downturns in the last, say, 30 years?
Reinhart: Well, let me make an apropos comparison: the 1982 recession was a fierce recession, and in fact, it was the worst recession up to that point in the post-war period. But after the economy bottomed out in the tail end of that year, we had a rip-roaring recovery by any metric. That rip-roaring recovery was, in part, fueled by the fact that the Fed was able to very aggressively lower interest rates. But also importantly — and this gets back exactly to the point you were making — household debt as a percent of GDP in 1982 was 45 percent. Household debt right now is more than twice that.
Moon: Are we less equipped to deal with this problem?
Reinhart: It’s not so much that we are less equipped, it is that a lot of the standard recipes don’t work as well. Monetary stimulus, there’s only so far that you can go; interest rates are already at record lows.
Moon: Behind that question of being less equipped, last week we spoke to somebody who’d noted that he’d lived through three recessions, and this was the worst, he said, because ‘our economy is less balanced somehow than it has been in the past.’ Not enough stuff is being made here, was his point. What do you think about that?
Reinhart: That’s a very valid point. We don’t get that kickback in employment because part of the globalization process has also meant outsourcing. The job market in America has changed structurally. Another reason why you would think of imbalances, we continue to borrow from the rest of the world. And that is an issue that sooner or later comes back to bite you.
Moon: This all sounds very complicated to me, which is to say, there is no easy way out still.
Reinhart: Indeed. No silver bullet. You cannot make your debts disappear as much as we would like. It’s not that we’re powerless; we have seen monetary and fiscal policies soften the blow. But they’re not capable of delivering that really robust rebound that we had out of other severe recessions like the 1982 recession, because we’re highly indebted.
Moon: Carmen Reinhart is a fellow at the Peterson Institute, and the book is called, appropriately enough, “This Time is Different.” Thanks for joining us.
Reinhart: Thank you.
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