Posted by: Josh Lehner | September 19, 2011

This Time is Different, An Update

UPDATE: The information below was originally published September, 2011; an update was done in September, 2012 and the latest employment graph (data through November 2013) is here.

The following provides an update on the great research that Carmen Reinhart and Kenneth Rogoff conducted regarding the build-up and subsequent bust of historical financial crises. While their work on crises was largely conducted in the time period leading up to and directly after the financial meltdown in late 2008, there does not appear to be any updates now that the U.S. economy has been in technical recovery for over two years at this point. Some of the facts and figures cited in This Time is Different and the authors’ academic papers were still a work in progress at publication date given that events were ongoing. With the benefit of hindsight, a longer time span and revised economic data (always a luxury), I have recreated and updated some of Ms Reinhart and Mr Rogoff’s work. Specifically, what follows (PDF – full version) is based on their draft paper for an American Economic Association presentation in January 2009 “The Aftermath of Financial Crises.

In order to not bury the lede, first up is a quick summary of the U.S.’ current experience relative to historical financial crises, followed later by graphs for each individual measure.

All told, the recent U.S. financial crisis looks very similar to the historical crises as detailed by Reinhart and Rogoff – just your “garden variety, severe financial crisis” if you will. Across each of the five measures discussed in the Aftermath paper, the current U.S. experience is of the same magnitude.

However the U.S. labor market has performed better than 4 of the previous Big 5 crises, as identified by Reinhart and Rogoff, in terms of job loss and the return to peak time line.

The question that naturally follows and is not answered here is why does the current U.S. cycle measure up in terms of the aftermath of financial crises except in the percentage of employment loss? Relative to Spain, Norway, Finland and Sweden, it appears that the U.S. did something right. Is it as simple as ARRA? Is it TARP and the backstopping of the financial industry? Is it the fact that, more or less, the world had a coordinated response in late 2008/early 2009 for expansionary fiscal and monetary policies?


________________________________________________________________________

Given the following historical facts (averages) that Reinhart and Rogoff found in their research, the purpose here is to find out how the current U.S. cycle compares.

Through June 2011, the S&P/Case-Shiller home price index (either the 10 city or 20 city composite) has declined 38 percent in real terms since mid-2006 while the historical average saw a decline of 35.5 percent over 6 years. There has been no definitive or sustained upturn in home values to date so this calculation is still a work in progress as prices may fall further and/or the decline may last longer than the current 5 years.

The historical average for percentage point increases in the unemployment rate was 7 percent over nearly 5 years. The U.S. employment rate this cycle increased 5.7 percentage points (from 4.4 to 10.1 percent) over approximately 3 years.

Real Per Capita GDP typically declines 9.3 percent, while the U.S. fell 6.35 percent from 2007 Q4 through 2009 Q2. Note that this calculation does include the most recent BEA revisions.

During the first three years after a crisis, public sector debt increases, on average, slightly more than 86 percent. Using the U.S. Treasury’s Debt Held by the Public figures, in the U.S. real debt has increased 78 percent from July 2008 through July 2011.

One item not addressed in their Aftermath paper is the actual level of employment and its large declines during and after crises. The following graphs provide context for how far U.S. employment has contracted during the most recent business cycle. The first graph is the standard, U.S. employment return to peak which compares the U.S. performance over post-WWII recessions. The current cycle is termed the Great Recession (or Lesser Depression, depending upon whom you ask), and with good reason. It is clearly the outlier in terms of job loss.

However, in the context of the Big 5 financial crises, the current U.S. cycle suddenly does not look quite as dire. Notice how the x-axis, how long it takes to return to peak levels of employment, is measured in years(!) not months like the first graph.

All told, the recent U.S. financial crisis looks very similar to the historical crises as detailed by Reinhart and Rogoff – your “garden variety, severe financial crisis.” However the US labor market has performed better than 4 of the previous Big 5 crises and Japan’s economic and employment experience over the past twenty years is unique in its own right.

Click here for the complete set of slides in PDF which includes another graph and data notes.


Responses

  1. […] essential reading over at the Oregon Office of Economic Analysis blog where Josh updates the Reinhardt and Rogoff […]

  2. Doesn’t this study overlook the fact that this crisis propagated worldwide much more than the crises cited, that occurred in mostly smaller countries while other countries were largely isolated from the crisis at the time?

    • It is true that the current cycle is a synchronized global event, just like the Great Depression was, while many of the other historical financial crises were more isolated (the Asian Financial Crisis being an exception). I would tend to believe that the global response to the crisis is one of the reasons that employment has not fallen quite as dramatically, nor the unemployment rate increasing as much as the average. One can argue the relative merits of the responses around the world in late 2008 and early 2009, however nearly every major and economically important country implemented some sort of fiscal stimulus and central banks cut interest rates. So yes, that does make this crisis different in terms of the breadth/scope of its global footprint, but in terms of these various metrics, the percent declines are fairly similar.

  3. […] Oregon Office of Economic Analysis has ventured an update to Carmen Reinhart and Ken Rogoff’s ‘This Time it’s Different‘, the seminal […]

  4. A key assumption here is that the crisis is over.

    • With all the metrics except housing price declines, I believe the assumption that the down phase of the cycle or the declines are finished. The probabilities that we will hit a new low in GDP or employment are low, however not completely ruled out, unfortunately. This does not speak to the recovery/rebound/expansion phase of the cycle which is sub-par at best at this point, relative to whatever one’s definition of “normal” is.

  5. […] Oregon Office of Economic Analysis has recently updated the Reinhart/Rogoff thesis and has a sobering conclusion: “the recent […]

  6. What is the difference between the blue and red color bars in some of the carts?

    • Good question. If you take a look at the PDF document, it explains the differences in the colors relate to information available at the time of publication for Reinhart and Rogoff in Dec 2008 and then what is available today. This provides an illustration of how the data has changed due to revisions and/or a longer time period.

  7. […] that it has been a year since the update to Carmen Reinhart and Kenneth Rogoff’s great work on financial crises, I thought it would be a good idea to check in on how the U.S. is doing relative to these other […]

  8. Hi – great piece. Can you confirm that the measures of unemployment are comparable, both across time and across the crises? Has the number been altered in who is or isn’t counted over time, and do the other countires have the same definitions? Thanks, Dave

    • Yeah, right, Dave! No one’s going to want to answer that question. Not based on the facts anyway. Trust me on that.

  9. […] at Oregon’s Office of Economic Analysis, decided to try to judge the past few years against a more appropriate baseline. He picked through Carmen Reinhart and Vincent Rogoff’s epic history of financial crises and […]

  10. […] at Oregon’s Office of Economic Analysis, decided to try to judge the past few years against a more appropriate baseline. He picked through Carmen Reinhart and Vincent Rogoff’s epic history of financial crises and […]

  11. […] Source: Josh Lehner […]

  12. […] Recession, as compared with the rest of the world? Calculated Risk brought up Harvard Economists Kenneth Rogoff and Carmen Reinhart’s study that showed the seven most severe downturns in modern history. Finland seems to have fared the […]

  13. […] and America is doing relatively well even compared to emerging nations in earlier debt crises. A recent update on Rogoff and Reinhardt’s work shows that, compared to 20 major international banking crises from Norway in 1899 through Thailand […]

  14. The graph employment loss seems to be grossly exaggerated for Finland and Sweden 1992.

    If I look up employment ratios at Eurostat, I see data with only half the variation

    • Thanks for commenting. I am not familiar with the eurostat employment ratios, however if you are referring to something like the unemployment rate, please see the Sept 2012 update I did to the same comparison.

      http://oregoneconomicanalysis.wordpress.com/2012/09/24/checking-in-on-financial-crises-recoveries/

      The best source I was able to find for the employment data is OECD. Some of the eurostat or even country specific statistical agencies do not have easily accessible historical data, however the OECD does. The Employment series under Main Economic Indicators in their online database is what I used.

  15. I ll get the OECD data only from 2004 on.
    (do you have an exact link ?)

    They are close but exactly like the Eurostat Data

    http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/

    left side, most popular databases, employment rate (or unemployment)
    from 1992 on

    As a neighbor, I am pretty sure we would have noted unemployment rates of 20%

  16. […] created by: Josh Lehner graph found via: […]

  17. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  18. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  19. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  20. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than most.Part Time for Economic ReasonsFrom the […]

  21. […]  http://guardian.co.uk/commentisfree/…, http://bloomberg.com/news/…, http://oregoneconomicanalysis.wordpress.com/…, http://mainlymacro.blogspot.ca/…,  http://blogs.ft.com/ftdata/… , […]

  22. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  23. […] and the recovery has been slower (the recovery from the 2001 recession was slow too). However, if wecompare to other financial crisis recoveries, this recovery has actually been better than […]

  24. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than most. Part Time for Economic Reasons […]

  25. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  26. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  27. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  28. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  29. […] the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been […]

  30. […] the recovery has been slower (the recovery from the 2001 recession was slow too). However, if we compare to other financial crisis recoveries, this recovery has actually been better than […]

  31. […] http://oregoneconomicanalysis.wordpress.com/2011/09/19/this-time-is-different-an-update/ […]

  32. […] (plus the Great Depression). Check out Ms Rampell’s post for more or read our previous posts (2011 original, 2012 update) for much more detail on comparing these […]

  33. […] From a longer term economic cycle perspective, this recovery, as measured by job creation, has been the slowest since World War II (see Calculated Risk chart below). However, if you consider other major garden variety historical global banking crises, our crisis is not much different (see Oregon economic study).  […]

  34. […] and Great Recession. Using Reinhart and Rogoff’s great work on historical financial crises, our office previously looked into comparing the Great Recession with these historical financial crises to see how the current cycle stacked up. Overall the Great […]

  35. […] and Great Recession. Using Reinhart and Rogoff’s great work on historical financial crises, our office previously looked into comparing the Great Recession with these historical financial crises to see how the current cycle stacked up. Overall the Great […]

  36. […] crises in recent decades, the current U.S. cycle has outperformed in terms of employment, even as most other measures of financial crises were just as bad — home prices, stock prices, GDP per capita, government debt and the […]

  37. […] exactly wrap itself in glory in advance of the crisis. However, as we did learn about the nature of financial crises, and the important implications that housing and government have on smaller and rural areas, it […]


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