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I told my students that Romney looked pretty foolish for going too hard on Obama’s economic record on the recovery data alone, given that I was very persuaded by Reinhardt and Rogoff’s excellent book (it’s an empirical study of 800 years of business downturns and they find that recoveries after financial crises seem to be “worse” than recoveries from other recessions).

Here is what Cochrane says,

Here’s my tentative view: Sure, recessions are worse and longer after financial crises…because governments go completely haywire and screw things up after financial crises. They bail out banks. They hike taxes on “the rich.” They transfer wealth. They bail out borrowers. They stomp all over property rights (GM.) Thus, they kill capital markets for a generation. They clamp down on the financial system in horse-left-the-barn efforts to regulate “safety.” (We are in this paradox of the 3% mortgage that nobody can qualify for.) They try big “stimulus” plans. They often end up with unsustainable government debts leading to sovereign default or inflation. I’m not making this up. Most of this is in Reinhart and Rogoff’s book!  So, perhaps if recessions are longer and deeper after financial crises, not as a matter of economics, but as a matter of particularly bad policy. This is the opposite of inevitability!

You don’t have to agree with me, but agree it’s logically possible. If so, then the refrain of “recessions are always longer and deeper after financial crises” starts to ring pretty hollow, doesn’t it? There is an unwitting implication that the historical average measures some law of economics, that has nothing to do with economic policies. That seems like a pretty big assumption!

I am beginning to take the view that none of us, anywhere, at anytime, know much of anything. I think such a view obviates the need for us to basically have a very high bar for doing much of anything too, at least collectively. Reflect for yourselves on how that (such ignorance) would impact your personal choices.

One Response to “Cochrane on the Depth of Recessions Following Financial Crisis”

  1. Michael says:

    I think such reflections are also important fo relections; it seems these days we are searching for a god-man who knows about all problems and has an active solution to solve them. I highly doubt that over 50% of the populace would be inclined to vote for someone who says “I don’t know” or have the attention span to listen to another mythical person – one who can eloquently explain why not intervening is a good solution.

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