Reinhart's Seven More Years of High Unemployment Hit Fed Today
As a seven-year-old in Cuba, Carmen Reinhart memorized the routes of ships carrying silver from Peru and Bolivia to Spain. By 16, she had moved to Miami and got a job at a Sears Holdings Corp. store reviewing credit applications and payment records.
That fascination with history and data has propelled a career at Bear Stearns Cos., the International Monetary Fund and the University of Maryland in College Park. Now Reinhart, 54, is using a paper studying 15 economic crises since World War II to warn Federal Reserve Chairman Ben S. Bernanke and fellow policy makers that sluggish growth and high unemployment in the U.S. might persist through 2017 or longer.
“Whether one looks at advanced economies or a whole sample that includes emerging markets, the picture is one of lower growth during the decade that follows the crisis,” she said in an interview from Washington this week. “We are already three years into this post-crisis window. The clock starts ticking in the summer of 2007.”
Reinhart’s work has made her the female economist most frequently cited by other economists. Her latest paper, “After the Fall,” co-written with husband Vincent Reinhart, is being presented today at the Fed’s annual symposium in Jackson Hole, Wyoming.
An unemployment rate of 8 or 9 percent over the next seven years is not “outside of the experience that we have documented,” she said. Her studies of crises in Finland, Japan, Norway, Spain and Sweden that started between 1977 and 1992 show median per-capita economic growth declined by 1 percentage point in the decade following the shock.
Reinhart’s work in the past 20 years has proved prescient, which she says is her proudest accomplishment. In 1992, as a researcher at the Washington-based IMF, she and Columbia University economist Guillermo Calvo wrote about the likelihood of abrupt reversals of capital flows into Latin America. That was before the Mexican peso collapse of late 1994. In 1996, a year before the Asian financial meltdown, she co-wrote a paper documenting the links between banking and currency crises.
“She’s done very important work and looked at things other people didn’t notice,” said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington. “Very few people have been able to turn out important papers with that kind of consistency.”
In a 2008 paper, Reinhart and co-author Kenneth Rogoff, a Harvard University professor and former IMF chief economist, identified the possibility of a deep, lasting effect on asset prices, output and employment that might result from the subprime mortgage crisis in 2007.
The paper helped form the foundation for a 2009 book titled “This Time Is Different: Eight Centuries of Financial Folly.” In it, Reinhart and Rogoff trace the similarities among financial crises dating back to Medieval times, including government defaults, banking panics and inflationary surges.
The 463-page book is “one of the most comprehensive treatments, in terms of time span and the effects that they looked at,” said Goldstein, who has known Reinhart for 25 years.
Rogoff, 57, calls his collaborator “an economist’s economist,” with a “broad knowledge of global history, politics and finance that is simply extraordinary.”
She is the No. 1 ranked female economist worldwide as of July, based on criteria used to judge the popularity of her work, according to RePEc: Research Papers in Economics, an online database of economic material operated by volunteers in 71 countries. She’s also the only woman listed among the top 50 U.S. economists.
‘A Little Sensitive’
“The way she looks at the world is very different from the conventional model, which uses the standard assumption that financial markets are perfect,” said Calvo, her professor at Columbia in New York. “She was always looking for imperfections in the market.”
While “well-noticed” by colleagues in the profession, “she’s a little sensitive about being overlooked by Ivy League schools for teaching positions,” said Calvo. “It’s quite remarkable that, given all her papers, she hasn’t been approached.”
That may be so because Reinhart hasn’t written a “technical paper with tools that can be used by other economists,” he said.
For her part, Reinhart says her biggest professional disappointment is that the kind of “empirical work I do is not well-rewarded in the profession.”
Family Flees Cuba
With a childhood love of the romance and adventure behind pirate lore and tales of shipwrecks, Carmen Castellanos fled Cuba at age 10 with her parents in the first decade of Communist leader Fidel Castro’s rule. Each carried a suitcase with three changes of clothes. Her father, an accountant, found work as a carpenter in Pasadena, California, while her mother became a seamstress.
After moving to the East Coast, she attended Florida International University in Miami and later Columbia, where her thesis adviser was Robert Mundell, winner of the 1999 Nobel Prize for economics. Her professors included Maurice Obstfeld, a specialist in international economics who now teaches at the University of California, Berkeley.
It was at Columbia that she met her husband, a former monetary-affairs director at the Fed and now resident scholar at the American Enterprise Institute, a Washington-based research organization that favors limited government and free markets. She says she often sat next to Vincent Reinhart in classes because he was one of the few fellow left-handers and she wanted to avoid bumping arms with other students.
Valentine’s Day Gift
For Valentine’s Day one year, Vincent Reinhart gave his wife statistical yearbooks from the League of Nations dating to the 1920s. She says her 53-year-old husband is now the first person to hear about and read her work, offering suggestions on drafts and commenting on the final versions.
Carmen Reinhart, who once studied fashion merchandising, says her “mistrust” of financial-market exuberance dates back to the 1980s, when she began work as an economist at Bear Stearns. At the time, the U.S. was experiencing recession and rapid disinflation, while Latin America got swept into a debt crisis.
Her almost decade-long collaboration with Rogoff began after he hired her to become a deputy director at the IMF, the agency created at the end of World War II to help maintain global financial stability. Rogoff recalls thinking her study of the links between banking and currency crises “seemed like a breath of fresh air compared to the more introspective papers everyone else was writing.”
Contrast With Geithner
The pessimistic outlook in her paper presented at Jackson Hole contrasts with the view of Treasury Secretary Timothy F. Geithner, who said this month that the U.S. economy is “gradually healing.”
The nation has more than a 50 percent chance of experiencing a lost decade like Japan, when a collapse in land and stock-market prices gave way to economic stagnation and deflation starting in the 1990s, according to Reinhart. To avoid that outcome, policy makers should immediately announce a plan to increase taxes and cut spending in about a year, she said, adding her husband generally shares the same position.
“We have the pretty clear view that you want to not necessarily implement austerity right now, but you certainly want to announce it right now, with plans to deal with the deficit and debt in a realistic time frame,” she says.
“Our recovery still leaves a great deal to be desired,” Carmen Reinhart said. “My concern is that because the U.S. is the world’s reserve currency, we can still borrow in bad times, and that a more Japan-like scenario lies in store. A lot of the forces are already in place.”
With the U.S. government’s gross debt rising to about 90 percent of gross domestic product as tax revenue declined during the recession, “we have to pay future attention to the debt.”
“You don’t want to pull the plug out completely on stimulus,” Reinhart said. Still, “you have to start thinking about what measures are required to curb the deficit, and cap or reduce the debt. You don’t have the luxury to focus on the choice of one or the other. You have to deal with both.”
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