Why we may recover stronger and faster from the current crisis.
by Kate Pavao, May 2010
In Rebound: Why America Will Emerge Stronger From the Financial Crisis (St. Martin's Press, 2010), labor economist and former adviser to Secretary of Labor Robert Reich Dr. Stephen J. Rose reminds us that this current economic crisis is not nearly as bad as the Great Depression. Here he tells us why the financial crisis got so bad, and why we won’t see another recession like this one anytime soon.
Profit: Your book strikes a rather hopeful tone. Why is that?
Rose: In some ways I describe the book as defending the obvious. If you look over a long period of time, from the 1800 to the present, or even the post-World War 2 period to the present, economic output—which we best measure as GDP per capita adjusted for inflation—has basically just continued to grow with little blips.
In the longer term, even the Great Depression doesn’t look that bad. And this is not like the Great Depression, when the maximum rate of unemployment was over 25 percent and a third of the nation was ill clothed, ill fed, and ill housed.
The notion that we don’t have growth ahead of us should be considered the default position. One would have to argue that there was something so unusual in this about this crisis and about the new distribution of economic power around the world, so that we and potentially other countries like Western Europe, will be going backwards. In my mind, my book is really answering the gloom and doom story that has gotten a lot of attention and showing why it’s unjustified on many fronts.
Profit: When you studied our current economic crisis, what surprised you most?
Rose: In the book, I talk about the current financial crisis as “brilliant idiocy.” I try to show that the mistakes were made in the grandest levels because financiers had ridden out crisis between 1982 and 2002 that seemed to be the crisis to end all crises. Some had very little effect. So they were really getting cocky. They just completely underestimated the downside risk, and therefore they would just go on. Even if they knew in their bones, this has got to be crazy, they just kept on doing it.
When people say they’re about to do it again, I would say that’s a mistake for the following reason: It takes two to tango. The whole system required a series of players, but in particular, they have to sell the bonds to somebody. After being so badly burnt, purchasers are not going to accept bonds based on strange premises of unknown quality in any reasonable period of time.
Profit: How quickly will we rebound?
Rose: There are two conflicting opinions on this. On one hand our last recoveries have been slow recoveries. Furthermore, if you analyze the past 40 to 60 years, recessions set off by severe financial crisis tend to last longer. But in the past, we’ve recovered slowly because we’ve had very little of a decline. With a stronger decline there’s reason to believe there might be a stronger bounce back. I don’t know for sure, and I don’t rule out a double dip. I don’t rule out a couple of bad quarters. But I also don’t rule out a really strong growth. I believe the most likely scenario will be three to five percent growth in 2010 and 2011.