Tuesday, January 06, 2009

Jobless Rate at 11%, Long Housing Slump?

stolen from the Wall Street Journal's economic blog

Economists Kenneth Rogoff of Harvard and Carmen Reinhart of the University of Maryland have a particularly grim view of the economic outlook.

In a fascinating new paper that Mr. Rogoff presented this weekend at the annual meeting of the American Economic Association, they offered some sobering details on what has happened to other countries in the aftermath of severe financial panics like the one the U.S. is now experiencing.

Their bottom line: If history is any guide, the housing market might not bottom until 2010, a stock market rebound isn’t in sight, the unemployment rate could exceed 11% and government debt is about to soar.

The work is an extension of long-running research by the two professors on the history of financial crises. In past work, they compared the U.S. situation to financial crises in developed countries. This time, they are adding in the experiences of developing after concluding that severe emerging-market crises aren’t all that different from crises in developed markets.

The paper is refreshing because it’s straightforward — it isn’t overloaded with Greek formulas and questionable regressions. Instead, they look at what happened to 22 economies ranging from Indonesia in 1997 to the U.S. in 1929 after a major crisis. (Most of the countries are from the past quarter century, though strangely, they lump in Norway from 1899.)

They find that unemployment rises by 7 percentage points on average after a severe financial crisis and doesn’t peak until four years after the crisis. The jobless right bottomed at 4.4% last year. If history is a guide, it could rise above 11% by 2011.

They find that housing downturns last six years — meaning a recovery is still about three years away. Moreover, stock-price declines last three and a half years and total 55%. That would put the Dow Jones Industrial Average below 6500 before this is done. Moreover, government debt reaches 86% of gross domestic product –- or $12 trillion. This last data point on government debt is particularly sobering. Despite all of the hope that policy makers are putting on fiscal stimulus, it’s not like it hasn’t been tried before.

Of course, this paper comes with all kinds of caveats. The U.S. is different in many ways from the emerging markets that suffered from crises in the past decade. For one, the U.S. borrows in its own currency, so it is not likely to suffer the kind of currency shock that they faced. And policy makers have learned from actions that others have taken in the past. The Fed, for instance, has been much more aggressive about attacking this problem than the central bank was in the Great Depression.

But as the professors argue, “one would be wise not to push too far the conceit that we are smarter than our predecessors.” — Jon Hilsenrath


Anonymous Anonymous said...

Hey, I came to this post fairly late, but thanks for putting it up. Full of nice, pertinent, yummy data. I want to read the paper now.

1:21 PM  

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