Page 50 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

■ DEPRESSION AVOIDED, RECOVERY LIMP ■

Thanks to aggressive political intervention, it looks like the
world will not experience a repetition of the Great Depression.
But the underlying problems in the world economy—global
trade imbalances, shaky banks, and overleveraged consumers in
many parts of the world—place a heavy burden on the recovery.
As a consequence, we are likely to face several years of slow eco-
nomic growth.
IMF research supports this view. IMF experts have analyzed the
recessions and downturns of the past 40 years and have come to the
conclusion that the recessions that were synchronized across devel-
oped countries and were associated with “financial stress” (in other
words, banking problems) were two to three times deeper than
“normal” recessions and lasted three to four times as long. What is
more, the upswings following these financial-stress recessions were
slower and weaker than they were after “normal” recessions.
In another study, entitled “The Aftermath of Financial
Crises,” University of Maryland Professor Carmen M. Reinhart
and Harvard University Professor Kenneth S. Rogoff point out
that all crises lead not only to a sizable drop in production and
employment but also to an average increase in public debt of 86
percent. This combination of factors comes about as a result of
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political efforts to stabilize the banks and the real economy. This
is in line with Japanese experience since 1990. It is also in line
with some projections of the U.S. Congressional Budget Office,
which estimates that the federal government will run a deficit of
$1 trillion each year for the next 10 years—and this figure is
based on rather optimistic assumptions about economic growth.
Governments know that these problems have to be
addressed. Although inflation may be seen as the simplest solu-

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