Friday, September 24, 2010

Seven More Years of Hard Times?

NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-run assessment of the future of the world’s economies.

The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.

According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.

Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. So we have to be historically oriented in our method. History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.

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