Sunday, February 10, 2013

The world is spending more time mired in banking crises


From the site:

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%.

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