The American economy may experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the Great Recession which began in 2007 with the collapse of the housing market according to the co-author of the celebrated book, This Time It’s Different: Eight centuries of financial folly; conceit and money.

Carmen Reinhart, an economist at the University of Maryland, who co-authored the book with Harvard University economist, Kenneth Rogoff, on Friday presented a paper at the annual Jackson Hole symposium for central bankers in Grand Teton National Park, Wyoming.

The paper co-authored with her husband, Vincent Reinhart, a former director of monetary affairs at the Fed, draws on research from the book and examines 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007collapse of the subprime mortgage market.

The Reinharts said that in the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took many years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the pattern was that the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

In ten of the 15 cases they researched, unemployment never returned to its pre-crisis low in the 10-year window after the crisis occurred. In many cases, unemployment has never gotten back to where it was. One illustration: The unemployment rate in Japan hit a low of 2.1% before its stock market and housing sector crashed in 1992. It has not been lower than 3.8% since then. Sweden had an unemployment rate of 1.7% before its 1991 crisis; it’s never been lower than 3.8% since then. The US unemployment rate hit a low of 4.4% in 2007 and hit 3.9% in 2000, before the tech bubble burst.

The economists say growth in gross domestic product (GDP) - -  a measure of the total output of goods and services in an economy - - tends to be 1% point slower in the decade after a crisis than it was in the decade before, they say. That means it is hard during these periods for the economy to make up lost ground.

“There is little good news to be found in the result that income growth tends to slow and unemployment remains elevated for a very long time after a severe shock,” the authors say. Policy-makers often make matters worse by making policy mistakes in an attempt to get unemployment back to its pre-crisis level. In past crises, they find, “political leaders sometimes grasp for quick fixes that impair, not improve, the situation.”

We at Finfacts have been sceptical of expectations of a return to the credit-fuelled pre-2007 economic times.

Optimism is of course important but as the Reinharts warned, policy-makers can make matters worse if they cannot see or ignore a changed reality.

In Ireland, political leaders have a fingers-crossed policy, hoping that an international recovery will spur economic growth. In the longer-term, the hope is that a researcher in a university lab will have the eureka moment that will trigger another economic miracle.

It could be called Lotto economics!   

VIDEO: Bloomberg TV interview with Prof. Reinhart, Aug 27, 2010

"We should expect below par economic performance and growth," Carmen Reinhart from University of Maryland, co-author of  'This Time is Different: Eight Centuries of Financial Folly,' said in a CNBC interview in April 2010. "In the near term, the problem is a highly leveraged private sector that still has to unwind."