Real economic costs of financial crises – part 1

Edward Prescott is sceptical about the cost of financial crises. He points out that although there were plenty of them over the course of the 19th century, America seem to still become the industrial leader.

croaking cassandra

A couple of days ago I looked at how one might best classify countries, as to whether or not they had experienced a “financial crisis” since 2007.  But this chart is one reason why I’ve become increasingly sceptical that “financial crises”, however one defines them, have large or enduring adverse real economic effects.  I think I first saw it in a sets of slides by Nobel laureate Robert Lucas, and every so often I would use it to try to stir up a bit of debate at the Reserve Bank.

maddisonUS

It is a quite simple chart of real per capita GDP for the United States, back as far as 1870.  These are Angus Maddison’s estimates, the most widely used set of (estimated) historical data, and as Maddison died a few years ago they only come as far forward as 2008.  The simple observation is that a linear trend drawn through this…

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