Search This Blog

Saturday, June 7, 2014

Apples and Oranges in Economics

How many times in recent years have you heard the line on television or on the net that recessions that arise from a "financial crisis" are different from all other recessions; supposedly, the recessions from financial crises take much longer before strong recovery can begin.  In the last five years, this claim about so call financial recessions has become a mantra heard on the mainstream media.  We get told this conclusion over and over again, but no one puts forth any proof to show that it is accurate.

Let me reveal for you a secret that is rather well kept by the media:  for the last 75 years (since the start of World War II) there have not been any recessions caused by a "financial crisis" in the USA aside from the one that began in 2008.  In other words, there are no modern recessions to which to compare the latest one.  We could go back to the Panic of 1873 which caused a severe recession and find an American downturn due to a financial crisis; that one was followed by a very strong economic rebound that got the economy moving to new heights in less than two years.  We could also go back to the Great Depression in which the financial crisis and banking collapse led to a downturn that lasted nearly a decade.  Neither or these events can tell us much about our latest recession, however.  The American economy of 1873 and of 1933 was a very different animal from the one in place today.

So what does this mean?  The media is still trotting out economists today to tell us that recovery from a recession due to a financial crisis is much slower than other recoveries, but there is no basis to say this.  So how can people keep saying this stuff?

For the most part, when pressed, the media and the economists who push this argument point to a study done of five recessions due to a financial crisis that occurred in other countries.  That's right, this is a study of recessions in Norway, Finland, Sweden, Spain and Japan.  Think about that.  Norway, Finland and Sweden combined have millions fewer people than live just in metropolitan New York City.  These are countries with tiny economies that can be easily moved by external causes.  Using these economies to predict the course of the American economy is like comparing steering a row boat to steering an aircraft carrier.  The Spanish economy is larger than those in Scandinavia, but it is still tiny compared to the USA.  What happened in recessions in these countries is actually of no relevance in predicting what ought to be happening in America.  The Japanese recession that began in the early 1990's at least involved a massive economy.  The problem, of course, is that the Japanese experience was the result of some very peculiarly Japanese causes.  It would be very silly to predict the course of the American economy based upon only one prior example; when that prior example, however, is clearly distinguishable from the USA, silly changes to misleading and inappropriate.

Put all this together, and what you are left with is the inescapable conclusion that there is no reason to believe that recessions resulting from financial crises behave in any different manner from other recessions.  The constant refrain in the media is actually just a failed talking point meant to justify the slowness of the recovery.



No comments: