The Slow Recovery from the 1890s, Redux
I have posted on this issue before, but I get so few chances to talk about the 1890s that I must take every opportunity.
Anyone who follows the econ blogosphere knows by now that there has been a long-running debate about just how rapid recoveries are when recessions are coupled with (or caused by) financial crises.
The debate was sparked by Rogoff and Reinhart’s claim in This Time is Different that recoveries from financial crises are typically slow. The counterargument by Taylor, Hubbard, and now a new study by Bordo and Haubrich, is that the current recovery is unusually slow by historical standards. The counterargument claims that recoveries from financial crises have actually been rapid historically, so something is unusual about our current slow recovery.
According to Bordo and Haubrich,
…recessions that were tied to financial crises and were 1% deeper than average have historically led to growth that is 1.5% stronger than average. This pattern holds even when we account for various measures of financial stress, such as the quality spread between safe U.S. Treasury bonds and BAA corporate bonds and bank loans.
At its heart, the disagreement is over a pesky little detail called measurement. How should we measure a recovery? Should it be measured as the rate of growth in some economic aggregate, as Taylor, Hubbard, Bordo and Haubrich argue? Or, should it be, as Reinhart and Rogoff argue, the time it takes for per capita income to return to its pre-crisis peak? While growth rates in income are certainly important metrics to consider (and they did increase rapidly in 1895, two years after the crisis), the Reinhart-Rogoff method seems more intuitive to me:
It also is a way to avoid exaggerating the strength of the recovery when a deep recession is followed by a large cumulative decline in the level GDP. An 8 percent decline followed by an 8 percent increase doesn’t bring the economy back to its starting point.
By the Reinhart-Rogoff metric, it took five years for the economy to recover after 1893. I’d point out that the labor market was even slower to return to “normal” after 1893: according to Romer (1984), unemployment rate was close to 9% as late as 1899 compared to an 1892 level of under 4%. David Whitten has argued, correctly I think, that “Only in mid-1897 did recovery begin in this country; full prosperity returned gradually over the ensuing year and more.”
Charles Hoffman’s 1956 Journal of Economic History paper summarizes:
“the period can be viewed as one long depression with a double bottom or two distinct cycles with a retarded recovery in 1895….If the peak-level of 1892-1893 is projected to the next full employment peak of 1902, to represent the growing full capacity of the economy, even at the cyclical peaks in 1895 and 1899 the economy was functioning 5 to 10 percent below capacity. At the 1894 and 1897 troughs, the level of operation was 25 percent, or more, below capacity. The depression which started in 1893 was not fully overcome until after 1900.”
So while it is true that the growth rate in real income was rapid in 1895, the entirety of the statistical picture in the 1890s does not give one much confidence that it was a “strong recovery.”