S.F. Fed Says Economy ‘Still in Recovery’ from Great Recession
Economists have found many ways to quantify the economic effects of the 2007-2008 financial crisis, but one number in particular stands out: $70,000.
That, says the San Francisco Federal Reserve Bank, represents the income each American lost as a result of the Great Recession. It said the decline in the economy’s productive capacity following the Recession–and the level of output since–is unlikely to revert to pre-crisis trend levels.
The study, The Financial Crisis at 10: Will We Ever Recover?, said the U.S. economy remains significantly smaller than it should be based on its pre-crisis growth trend.
“The size of the U.S. economy, as measured by GDP adjusted for inflation, is well below the level implied by the growth rates that prevailed before the financial crisis and Great Recession a decade ago,” wrote authors Regis Barnichon (San Francisco Fed), Christian Matthes (Richmond Fed) and Alexander Ziegenbein (University of Vienna, Austria). “The United States is not alone; the United Kingdom and European economies also remain far below the levels implied by their pre-crisis trends.”
Based on previous trends, the authors said output might not revert to the level implied by its pre-crisis trend. “When the economy is doing poorly or in a recession, favorable financial conditions may not necessarily stimulate economic activity if there are no investment opportunities,” the study said. “As such, financial conditions may cool a hot economy but might not heat up a cool one.”
By testing economic models under various conditions of stress, the authors concluded during recessions, the overall appetite for risk normally decreases as the financial sector becomes more risk-averse or simply has fewer funds available to lend.
“Without the large adverse financial shocks experienced in 2007 and 2008, the behavior of GDP would have been very different,” the study said. “It would most likely resemble the less severe 1991 recession, with GDP declining by only 1.5% and reverting to close to its pre-crisis trend level in a few years. This behavior is in stark contrast to actual GDP, which has not reverted to its pre-crisis trend level.”
A mild recession, the authors said, would have resulted in e gap between output and potential output of only 5 percentage points, instead of the 12 percentage points observed today. “This is a large number: In dollar terms, it represents a lifetime income loss in present-discounted value terms of about $70,000 for every American,” they said.
Financial market disruptions, the authors added, can have large costs in terms of societal welfare by causing persistent losses in the level of GDP. “This suggests that finding ways to prevent or contain future financial crises is an important research and policy priority,” they said.
