To critics of the recovery Barry Ritholtz retorts that what we’ve experienced is just what one would expect in a “balance sheet” recovery:
First, the specifics: By just about every economic metric, this has been a mediocre, subpar recovery. For the first few years following the end of the recession in June 2009, employment increased slowly. Wages to this day have been little changed. Retail sales have been inconsistent; housing has seen soft sales numbers, while price increases have been a function of a lack of inventory caused by limited amounts of home equity and immobility as a consumer try to reduce debt. Gross domestic product growth has been weak and lacking in consistency.
The context is simple: When we discuss expansions, we typically are referring to the later half of a typical economic contraction-expansion cycle. That is what is typically referred to as a post-recession recovery.
However, that huge outlier is a clue that we are using the wrong data set. The post-World War II recession recoveries are the wrong frame of reference; the proper one is the much more severe set of credit-crisis collapses and recoveries.
Economists Carmen M. Reinhart and Kenneth S. Rogoff figured this out before the scale of the crisis even was apparent. In January 2008 they published a paper titled “Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison.” They warned that the U.S. subprime mortgage issue was turning into a full-blown credit crisis, not just a typical recession. I discussed this extensively in February 2008.
The economic researchers were astute enough to not use other recession-recovery cycles as their comparison when discussing the pace of growth in the U.S. economy after what they said would be a collapse caused by subprime mortgages. Instead, they suggested looking at five previous financial crises — Japan (1992), Finland (1991), Sweden (1991), Norway (1987) and Spain (1977).
IMO the greatest problem with his analysis is that he doesn’t take it far enough. However much fiscal stimulus Japan has deployed (Japanese public debt is now well over twice GDP), twenty years on Japan still hasn’t recovered from its financial crisis. Neither has Spain.
Sweden, Finland, and Norway did recover but all nationalized at least some of their banks in one form or another, something we have demurred from doing.
Additionally, the fiscal stimulus we’ve applied has been under the assumption that what was happening was an ordinary cyclic downturn. The sort of stimulus that was applied, first by the Bush Administration and then by the Obama Administration is very unlikely to do much good. Then what has happened to all of that stimulus? Mr. Ritholtz hit that nail directly on the head in a post from six years ago that he labelled as “humor”: it was sent to China. We import too much from China for conventional “pump-priming” stimulus to be particularly useful.
Mr. Ritholtz can’t have it both ways. Either we had a “balance sheet” recession and the policies during and since the recession have been at worst counterproductive or at best ineffectual or the policies have been right and we’ve had the weakest recovery since the end of World War II. Take your pick.