While the causes of the global financial crisis have been discussed at length, and solutions are still being vigorously debated, the Dallas Fed has released the first comprehensive study of the total cost that the U.S. incurred between 2008 and now. Estimated losses range from $6 trillion to $30 trillion, with the possibility that the economic activity in the U.S. could be permanently stunted.
Pre-crisis trend path
“Our bottom-line estimate of the cost of the crisis, assuming output eventually returns to its pre-crisis trend path, is an output loss of $6 trillion to $14 trillion,” write David Luttrell, Tyler Atkinson, and Harvey Rosenblum. “This amounts to $50,000 to $120,000 for every U.S. household.”
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Their paper considers two different approaches to estimating the cost of the recession: the path of output and the path of consumption. The $6 trillion – $8 trillion estimate is the result of measuring the amount of lost output, but if you measure the decrease from expected consumption over the same time frame, the U.S. may have lost as much as $30 trillion from the crisis.
Fed assumptions on U.S. trends
However, both of these numbers assume that the U.S. will eventually return to trend, and there is good reason to think that won’t happen.
“Output per person as of mid-2013 stood 12 percent below the average of U.S. economic recoveries over the past half-century, corroborating a large body of literature suggesting that recoveries from financial crises are slower than rebounds from typical recessions,” the authors write. “Output may never return to trend—the path of future output may be permanently lower than before.”
What’s harder to estimate is the human cost of the crisis. Even while unemployment has come down, labor utilization rates are depressingly low because so many people are underemployed or have stopped looking for work. Also, for the first time in fifty years, most households expect their earning power to decrease over time. Trust in government, already low before the crisis, has continued to drop as bailouts have been seen as proof of a system that rewards the powerful.
“Saving the system from complete collapse—especially with extraordinary government assistance, including bailouts to a handful of giant financial institutions reinforced a perception that public support exists primarily for large, interconnected, complex financial entities,” the report says. “This special treatment violated a basic tenet of American capitalism: All people and institutions have the freedom to succeed and also to fail based on the merits of their actions.”