By William Watts
That’s the bleak assessment delivered by economists Carmen Reinhart and Vincent Reinhart in an article published online Thursday that will appear in the September/October issue of Foreign Affairs. Carmen Reinhart, a well-known Harvard economist, was appointed chief economist at the World Bank after completing the article. Vincent Reinhart was a top staffer at the Federal Reserve under Alan Greenspan and is now chief economist at BNY Mellon.
The memory of the Great Depression of the 1930s has made many economists reluctant to use the term to describe the current situation, they wrote. While the Great Depression was “wrenching in both its depth and its length in a manner not likely to be repeated,” they said, the 19th and early 20th centuries were, in fact, “filled with depressions.”
They noted that in recent global downturns, some engines of growth remained intact. Most recently, for example, emerging markets, notably China, were a key source of growth in the 2008 financial crisis. “Not this time,” they said. “The last time all engines failed was in the Great Depression; the collapse this time will be similarly abrupt and steep. ”
The U.S. economy contracted at an annualized pace of 32.9% in the second quarter, according to official data, the sharpest since at least the late 1940s.
Some economists have argued, however, that the sharp contraction created as the pandemic forced the near-shutdown of the U.S. and other major economies will give way to a quick rebound and that the accompanying recession may have already ended. The stock market has roared back from its pandemic-induced plunge in February and March, with the S&P 500 (S&P:SPX) ending Wednesday less than 2% below its all-time closing high from Feb. 19.
The authors acknowledged that some important economies are reopening, reflected in improving business conditions across Asia and Europe and in a turnaround in the U.S. labor market. “That said, this rebound should not be confused with a recovery ,” they wrote.
In the worst financial crises since the mid-19th century, it took, on average, eight years for per capita GDP to return to the precrisis level, they noted, while the median was seven years. Historic levels of monetary and fiscal stimulus might allow the U.S. to fare better, but most countries don’t have the capacity to offset the economic damage from the pandemic, they said, which means the rebound “is the beginning of a long journey out of a deep hole.”
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They see three reasons for a long slog back to economic growth: the hit to global demand from border closures and business lockdowns that have hit export-dependent economies hard; a sharp rise in unemployment that’s likely to remain stubbornly high; and the regressive impact of the crisis, which has seen hit those with lower incomes the hardest.
“There is no one-size-fits-all solution to these political and social problems,” they argued. “Officials need to press on with fiscal and monetary stimulus. And above all, they must refrain from confusing a rebound for a recovery.