Krugman:
People have been asking me for a while to respond to John Taylor’s claim
that financial-crisis-induced recessions aren’t characterized by slow
recovery. It’s a very convenient claim for Romney/Ryan, of course,
because if true it eliminates the best excuse for lackluster performance
under Obama.
Well, Reinhart and Rogoff, who literally wrote the book on crises and their aftermath, have weighed in, and they’re not happy. They have two main complaints, both of which are completely valid.
The
first is that looking at the rate of recovery from the trough is a very
peculiar criterion — especially when, as Taylor does, you look only at
the first year (!) of recovery. By this standard, the New Deal was a
tremendous success story, because growth was fast in 1933-4. Never mind
the fact that pre-crisis per capita GDP wasn’t restored for more than a
decade. As R-R say, surely the relevant comparison is with the
pre-crisis peak, especially given the fact that post-crisis economies
often suffer periods of relapse (as is happening in Europe now).
The
second is that Taylor is awfully free in designating recessions as the
result of financial crisis. He counts 1973 and 1981 as financial crises,
to which the only answer if you know your history is, what on earth is
he talking about? These were both disinflation recessions, caused more
or less deliberately by the Fed; the Fed pushed interest rates very high
to calm prices, and a V-shaped recovery took place once the Fed decided
we had suffered enough. This isn’t hindsight: the contrast between
those kinds of recessions and the slump following the bursting of a
housing bubble was the reason many of us predicted a long, slow recovery
well in advance. (It’s been even slower than I predicted back then, but in early 2008 I didn’t realize how bad the debt overhang was).
Taylor is, simply put, an idiot.
