Earlier this month, forecasters missed the mark by a wide margin on the June jobs report, far overestimating the number of jobs that would be created. And, says Barry Ritholtz, a big reason for that and other flawed forecasts during the economic recovery is simple: Analysts and economists are using the wrong historical measuring stick.
“History suggests the correct frame of reference [for this recovery] is not the usual contraction-expansion cycles, but rather credit-crisis collapse and recovery,” Ritholtz writes in the Washington Post. “These are not your run-of-the-mill recessions. They are far rarer, more protracted and much more painful.”
Ritholtz points to the research Carmen M. Reinhart and Kenneth S. Rogoff have done into post-financial-crisis recoveries as a better yardstick. In analyzing financial crises throughout history, they found several “surprisingly consistent elements”:
- Asset market collapses were prolonged and deep, with real housing prices falling 35% on average over six years and equity prices tumbling an average of 55% — figures that are “stunningly close to what occurred in the U.S. crisis of 2007-09”, Ritholtz says.
- Aftermaths of banking crises are associated with profound declines in employment. After a financial crisis, Reinhart and Rogoff found that unemployment rates increased an average of 7 percentage points over four years — just about the same increase we’ve seen this time around, Ritholtz says.
- Government debt surges, rising an average of 86%. And it’s not because of bailouts — it’s because tax revenues plummet.
There’s another big misconception about the recovery, Ritholtz says: A credit bubble recovery is different from a recovery from other asset bubble recoveries. Most bubbles leave behind something of value — like the thousands of miles of fiberoptic cables laid in the 1990s — that can eventually become a productive asset. “Compare that with what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt. And not just regular old balance-sheet obligations, but huge piles of counterproductive consumer and government liabilities,” Ritholtz says.
Consumers and governments are thus left paying down debt rather than spending, which further dampens the economy. That means that “misguided” austerity measures only compound the problem, he says, noting, “Even when the private sector manages to create some jobs, it’s offset by public-sector job cuts.”