- The Washington Times - Friday, September 18, 2009

The U.S. and world economies will recover at a much more rapid pace than projected by most private economists and official institutions, including the Federal Reserve and the International Monetary Fund, says a former chief economist of the IMF.

“The occasion today is the funeral of the Great Recession of 2008 and 2009,” Michael Mussa confidently asserted Thursday at the Peterson Institute for International Economics, where he made his relatively bullish forecast.

“The recession is over, and the global recovery is under way,” said Mr. Mussa, who became a senior fellow at the Peterson Institute in 2001 after serving 10 years as the IMF’s chief economist.

Frequently citing the Zarnowitz Rule, named after the late Victor Zarnowitz who served for decades as a highly regarded business-cycle economist at the Conference Board, Mr. Mussa repeatedly reminded his audience: “Deep recessions are typically followed by steep recoveries.”

The recovery from the 2008-09 recession will be no different, he insisted. It will mirror the typical V-shaped expansions that normally follow deep economic downturns, including the recoveries from the 1981-82 and 1973-75 recessions and from the 1929-1933 depression.

After a 2.4 percent decline in gross domestic product (GDP) in 2009, the U.S. economy will expand by 4 percent in 2010, according to Mr. Mussa’s forecast.

The world economy, which he expects to decline by 1.1 percent this year, will grow by 4.2 percent in 2010, he said.

Mr. Mussa’s U.S. growth rate for next year is twice as fast as the 2 percent rate projected last month by the White House. The IMF’s latest forecast predicts a U.S. growth rate of just 0.8 percent next year.

For the six quarters ending with next year’s October-December period, the U.S. economy will cumulatively expand by 6.8 percent, Mr. Mussa predicts. That’s more than twice as fast as the 3.3 percent growth that is projected in the latest Blue Chip consensus forecast, which includes estimates from about 50 private economists.

Mr. Mussa rejects the argument that recoveries from financial crises are typically weak. “Almost by definition, all deep recessions are characterized by difficulties in the financial sector,” he said. “It is the recovery of the economy that fixes the banking sector, not the recovery of the banking sector that fixes the economy,” he repeatedly emphasized.

“There is a failure to recognize that the U.S. financial system was in deep difficulty after the recessions of 1973-75 and 1981-82,” said Mr. Mussa, who served on the Council of Economic Advisers during the Reagan administration. “And yet recoveries after both recessions were steep,” he said.

“The banking system was a total mess in 1933, yet GDP increased by 30 percent from the trough of 1933 to the middle of 1936,” he added.

Although Mr. Mussa expects a typical V-shaped recovery, he noted that it still will not be nearly as steep as the V-shaped recovery that followed the 1981-82 recession, when GDP expanded by nearly 12 percent over the next six quarters. That’s nearly twice as fast as the six-quarter expansion Mr. Mussa expects after the 2008-09 recession.

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