There was a muddle of new economic news this week that delivered a mixed message on the state of our lagging economic recovery.
First, there was the GDP report showing that the U.S. economy had actually contracted slightly in the fourth quarter of 2012. That number sent brief ripples of anxiety throughout markets and the political class, though the contraction was due almost entirely to a sharp decrease in defense spending at the end of the year.
Then the monthly jobs report on Friday delivered much more hopeful news: Not only were a respectable 157,000 jobs added in January, but the Labor Department also announced that the jobs numbers in November and December had been revised upward to add an additional 127,000 jobs.
That’s good news, but it’s not enough to get us back to full employment any time soon. Even if we add an average of 208,000 jobs per month, we won’t get back to pre-recession levels of employment until August 2020, according to The Hamilton Project. That finding depends in part on estimates of how many new people will enter the workforce, but it’s largely consistent with the findings of a new paper from the Bank of England that investigates the long-run effects of banking crises.
As the authors of that paper found, banking crises are fundamentally different from other kinds of economic crises, like debt crises and currency crises. Banking crises tend to produce both a short-term drag on productivity and, also, a long-term drag on growth. As Peter Orszag, the former director of the Office of Management and Budget, wrote this week:
For each year of a financial crisis, the level of gross domestic product per capita is reduced in the long term by 1.5 percentage points. In other words, a crisis lasting five years permanently lowers GDP per capita by a whopping 7.5 percentage points.
So banking crises are incredibly destructive for the economy broadly, as well as for human capital and even for our political institutions, as economist Joseph Stiglitz has noted. And not only do banking crises restrain growth in the long term, they also produce vastly inequitable distributional effects. In the first year of the recovery, for example, the top 1% of earners recovered 90% of the income gains. Corporate profits have soared to a high of 10% of GDP, while employee compensation has fallen to a low of 43.5%.
Those are all powerful reasons why banking crises are worse, generally, than other types of economic crises. And yet, as the Bank of England paper found, the world is spending a shocking amount of time stuck in just these types of crises. In a rather stunning finding, the authors report that, from 1950 to 1979, the world spent just 0.9% of country-years in banking crises. From 1980 to 2010, the world spent 19.8% of country-years mired in banking crises, a massive and unparalleled increase.
There are all sorts of policy decisions responsible for that increase, but the effects are devastating and destructive both to growth now, in the short term, and to the country’s greatest economic resources, like our human capital and our political institutions, in the long-term. The bottom line is that we need to spend much less time caught up in these sorts of corrosive banking crises. Right now, as Stiglitz wrote in a recent op-ed, “The American dream–a good life in exchange for hard work–is slowly dying.”