Carmen Reinhart

This article is a contribution to 'Is There Anything That Can Be Done? A TNR Symposium On The Economy.' Click here to read other contributions to the series. As the Great Recession drags on and on, it’s natural to wonder if we will ever get back to normal. Why is the recovery from this recession taking so long? Why was the recovery from other severe recessions, for example the 1982 recession where unemployment reached 10.8 percent, so much faster?

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Today, more the two years after the official start of the recovery, we find ourselves mired in slow growth and high unemployment. The majority of Americans cannot distinguish between this recovery and stagnation, if not continued recession. One question is why the economy is performing so much worse than in the previous post-recessionary periods since World War Two. And once we think we have an answer to that question, we have another: What is to be done? Economics is the obvious place to turn for answers.

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Do a thought experiment: Think back a year ago to what most analysts were predicting for the financial sector and for the state of the economy. In his newspaper column, Paul Krugman repeatedly warned that the policies adopted by the Bush and Obama administrations would have dire consequences. There was talk in other corners about no new business lending, slumping retail sales, and rising unemployment with no end in sight. But here we are—in the midst of a rebound. Each week over the last year, a number of positive and negative economic indicators were announced.

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It may surprise some people to learn that I intend my TNR columns to start conversations, not end them. I offer what I hope are evidence-based arguments, with full awareness that others may know more than I do. In the end, I am satisfied if the debate has advanced. My most recent column is a case in point. In it I raised some questions about Keynesian economics, and also about Paul Krugman’s use of Japan as a leading indicator of the risks to which the U.S. economy is exposed. Krugman’s terse response makes two main substantive points.

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This past Friday, without much fanfare, CBO submitted its analysis of President Obama’s proposed FY 2011 budget. The bottom line is worse than we thought. Despite sustained economic recovery, the budget deficit under the president’s proposal never falls below 4 percent of GDP over the next decade and rises to 5.6 percent by 2020. The aggregate deficit during that period is $9.761 trillion—close to $1 trillion each year on average. Not surprisingly, debt held by the public rises steadily and reaches 90 percent of GDP by 2020.

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Beware the Meme!

My favorite moment from last month’s White House jobs summit came when the president asked if Washington had been doing something to discourage hiring. At this point, a man named Fred Lampropoulos, the CEO of a Utah-based medical device manufacturer, chimed in that yes, in fact, it had. “[T]here’s such an aggressive legislative agenda that businesspeople don’t really know what they ought to do,” Mr. Lampropoulos told the president, according to The New York Times. Political uncertainty, he said, “is really what’s holding back the jobs.” Well, okay.

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Both Jon Chait and Zubin cite this excellent Nate Silver post bringing some data to bear on whether the unemployment rate will pass 10 percent. Silver's argument is partly a response to my point that, as the economy improves and people not previously considered part of the labor force start looking for jobs, the ranks of the unemployed will swell (and the unemployment rate will rise) even if the pace of job losses slows or we start creating jobs.

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During his first 100 days in office, President Obama has honed his economic program, and his defense of it. There is no longer any question about what he intends to do. As the croupiers in Monte Carlo say, les jeux sont faits. The remaining uncertainties are these: Will it work? If so, how long will it take? And what are the likely political consequences? The short answer to the first question is, we don't know. Much depends on the willingness of private investors to buy troubled assets and take them off the balance sheets of major financial institutions.

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