- The US and other major economies suffered permanent damage to their growth trajectories following the Great Recession of 2007-2009, according to a paper published by the San Francisco Fed.
- “A decade after the last financial crisis and recession, the US economy remains significantly smaller than it should be based on its pre-crisis growth trend,” the study finds.
The damage represents a “lifetime present-value income loss of about $US70,000 for every American.”
It’s not called the Great Recession for nothing: the deep slump of 2007-2008, marked by a historic financial crisis, left a lasting dent on the American economy that persists to this day.
Indeed, a new San Francisco Fed Letter shows the US economy’s growth path took a permanent hit because of the meltdown of 10 years ago.
“A decade after the last financial crisis and recession, the U.S. economy remains significantly smaller than it should be based on its pre-crisis growth trend,” Regis Barnichon, research director at the San Francisco Fed, writes with two co-authors.
“The size of those losses suggests that the level of output is unlikely to revert to its pre-crisis trend level.”
And here’s a startling result: “This represents a lifetime present-value income loss of about $US70,000 for every American.” This does not account for the country’s highly skewed income distribution, and naturally the hurt was disproportionate at the bottom end of the scale, where wages have been stagnant and financial asset ownership is minimal.
And it’s not just the United States: the UK and European economies are also operating far below the levels implied by their pre-downturn trends.
“Without the large adverse financial shocks experienced in 2007 and 2008, the behaviour of GDP would have been very different,” the authors write.
US GDP did expand at a robust annualized rate of 4.2% in the second quarter, but most economists expect the underlying trend remains not far above 2%. Trend growth before the crisis was more like 3%.
“Financial market disruptions can have large costs in terms of societal welfare by causing persistent losses in the level of GDP,” the authors conclude. “This suggests that finding ways to prevent or contain future financial crises is an important research and policy priority.”
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