Do crises matter?
William Easterly suggests that economic crises don’t matter in the long run because growth usually reverts to a mean of two percent per capita per annum. We should stop panicking, because the long-run trend overcomes any temporary trouble. As Carmen Reinhart and Kenneth Rogoff show in This Time is Different: Eight Centuries of Financial Folly, a compounded two percent over two centuries of capitalism was enough to increase average incomes 12 times.
As usual, aggregates don’t tell the whole story. The first question should be: who loses? On Easterly’s blog Ross Levine points out that:
this crisis, including the build-up and the resolution, involved a massive redistribution of wealth to the very wealthy
As a result of the current crisis millions of people in developing countries suffered from a drop-off in incoming foreign investment and demand for their countries’ exports, as well as a fall in foreign aid. This sudden empoverishment had catastrophic results: kids not going to school; joblessness, hunger and malnutrition. It simply isn’t relevant, as Easterly might, to suggest that things will be all right again in a decade. At the bottom of the pile the human losses are permanent, and they won’t be assuaged by a future rise in average wealth.
In developed countries unemployment has climbed in recent years and looks set to remain high. Inequality rose throughout the boom years, a fact which was disguised by the headline growth figures. In the UK real wages stagnated. Earnings for the top 10% doubled over the last 30 years, while those at the bottom were only 27% better off.
Previous crises have had similar long-lasting effects. In the US following the great depression, unemployment didn’t fall back below 10% until 1941 despite several years of rising economic output. The horrifying — and permanent — impact of the depression on ordinary people has been well documented.
So rather than not panicking, we should be actively intervening to mitigate the impact of the economic downturn on the worst-off. The rich can cope. The poorest can’t.