This Recovery is Different

BRUSSELS – The misguided belief that “this time is different” led policymakers to permit the credit boom of the early 2000’s to continue for too long, thus preparing the ground for the biggest financial crisis in living memory. But now, when it comes to recovery, the belief that this time should not be different might be equally dangerous.

Many policymakers and economists have observed that the recovery from the 2007-2008 financial crisis has been much slower than most recoveries of the post-war era, which needed only a little more than a year, on average, to restore output and employment to their previous levels. By this standard, the current recovery is unacceptably slow, with both output and employment still below the previous peak. Policymakers thus feel justified in using all available macroeconomic levers to achieve a recovery that resembles those of the past.

In doing so, officials are reluctant to take into account that the recent crisis resulted from an unprecedented credit boom gone bust. To some extent, it should have been logical to expect an unprecedented upturn as well. When the crisis erupted, many hoped for a V-shaped recovery, notwithstanding a substantial body of research showing that recoveries from recessions caused by a financial crisis tend to be weaker and slower than recoveries from “normal” recessions.

The observation that recoveries following a financial crisis are different suggests that standard macroeconomic policies might not work as one would usually expect. And a transatlantic comparison suggests that this may indeed be the case.