When you’re done reading today’s news stories about the crisis, take a deep breath. Media coverage is focused on the very short term, as usual. Speculation abounds that we live in a different world now. I’m reminded of portentous claims after the Asian Financial Crisis that “the miracle was over”, claims which look very overwrought in hindsight. In historical perspective, many of the most worrisome recent crises are small bumps on a very long road.
The entire effect of the 1994 so-called “Tequila” Crisis on per-capita real income of the average Mexican, as you can see in the first figure below, was erased in exactly three years. In Thailand, epicenter of the 1997 Asian Financial Crisis, it took all of six years. In Indonesia, the poverty rate in the population was back to its pre-crisis level within just three years. Even the big, bad 1982 Latin American debt crisis, in this figure, looks a lot more like mean reversion: Yes growth was bad in Mexico after 1982, but it had been unusually high in the years beforehand, and the net result is that real income per capita simply reverted to its historical trend. The same goes for Thailand in 1997. Bad years are typically followed by offsetting good years, and good years by bad. The good years get smaller headlines, or none at all.
The point is that in the long march of development, some financial crises amount to rounding error relative to the real economy, and the real economy affects welfare. A more important question is why Thailand has managed to reduce poverty by so much more than Cambodia or Guinea. Nothing that happened to South Korea in the Asian Financial Crisis came within a light-year of producing as much poverty, even transitorily, as North Korea has managed to produce sustainably. Now, as ever, the big forces shaping the lives of the poor are not in the headlines.
As for whether or not the current financial crisis will make much difference to income growth in the United States over time, have a look at the second graph below. This is the best estimate of real income per capita in the United States since 1820. Over these years we had violent financial crashes of various types, bank panics, piles of recessions and a huge depression, many foreign wars and one enormous domestic war, had a central bank and didn’t, were on the gold standard and weren’t, had governments topple in scandal and multiple leaders assassinated, and what did it all amount to in the medium to long run? In per-capita income terms: Nothing. The overall trend does not bend or shift. Every bad year was followed by a good year that returned us to trend. The US average growth rate of real per capita incomes over the last 190 years has been 1.8% a year, and the same rate over the last 10 years has been…. 1.8% a year. Stare at that graph: The Great Depression was traumatic in countless ways, but astonishingly, it’s not clear that we are any worse off today than we would be if the whole thing never occurred. Anyone who made such a claim in the 1930s would have been scoffed at, but that’s what happened.
Here’s a truly urgent question: Why are Americans 100 times richer than Congolese people, mostly by dint of being born American, and what can be done to help ameliorate that gap to some degree? Both graphs show that many of the biggest crises we know of contain almost no information about why rich countries are ever so rich, and others ever so poor.
Each of the blips on that US graph makes people very worried, newspapers can (and did) play them up, and worried people rewarded the publishers by buying lots of newspapers. We should take a longer view. It is always possible that the current crisis may be different from many others, but that’s not even close to a foregone conclusion.