Dallas Federal Reserve researchers Tyler Atkinson, David Luttrell and Harvey Rosenblum have a new paper out in which they attempt to calculate the true cost of the 2007-2009 financial crisis and recession.
“The 2007-09 Financial crisis was associated with a huge loss of economic output and financial wealth, psychological consequences and skill atrophy from extended unemployment, an increase in government intervention, and other significant costs,” they write.
And they do offer a nominal range of figures, which we’ll get to in a moment.
But their larger conclusion is that the combination of measurable declines in output and future losses are so vast, that an accurate cost is practically incalculable.
“Many of these consequences are intangible or difficult to measure,” the trio write in “How Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis.” “The cost is at least equal to the economic output that would have been produced but was not — 40 to 90 per cent of one year’s output [emphasis theirs]. But in light of the less-tangible consequences, the total cost likely exceeds the value of one year’s output.”
To get at that 40% to 90% range, they consider three estimates for trend GDP growth rates and what losses look like relative to each.
First, assuming constant GDP per capita growth, you see GDP growing a higher than 4%. Under this scenario, the U.S. economy lost $11.7 trillion.
Next, assuming constant GDP per working-age adult growth, growth is near 4% then slows. The estimated loss under this scenario was slightly less worse at $9 trillion.
Finally, assuming the prerisis CBO potential output forecast, you get $6 trillion in losses.
But none of these accounts for losses stemming from unemployment, they write.
Throw that into the mix, and you get a loss of $14 trillion, which happens to be the average annual output of the entire U.S. economy:
In 2008-12, unemployment related to the weak economy prevented roughly $900 billion in earnings. According to the findings in Helliwell and Huang [“New Measures Of The Costs Of Unemployment”], society would have given up fifteen times this — $14 trillion (in 2012 dollars, 90 per cent of 2007 output) — to avoid the negative consequences to well-being from unemployment rising above its natural rate through year-end 2012.
Yet even this may short-change the true dollar amount of losses.
The above quote comes from a chapter entitled, “The Unquantifiable Costs Of National Trauma,” which also includes sections like “reduced opportunity” and “damaged public trust.”
Those items have knock-on effects on future gains that are unfathomable, they say:
The narrowest and most easily quantifiable cost of the crisis is large, and the consequences are vast. Given our range of estimates, the tepid economic recovery, and the litany of other adverse effects stemming from the Second Great Contraction, we suggest that the total domestic cost is likely greater than the equivalent of an entire year’s output.
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