It’s been 10 years since the financial crisis and Great Recession, and while politicians tout a low unemployment rate and a humming economy, plenty of people would disagree with their assertion that recovery has spread its mantle over the country.
So does an economic letter from the Federal Reserve Bank of San Francisco, which points out that not only is the economy “significantly smaller than it should be based on its pre-crisis growth trend,” but Americans—all of them—lost $70,000 in present-value lifetime income thanks to the financial crisis.
The size of the “large losses in the economy’s productive capacity following the financial crisis,” says the letter, “suggests that the level of output is unlikely to revert to its pre-crisis trend level.” And that loss of productive capacity translates to that $70,000 loss.
Of course the wealthiest among the population might not even notice such a loss, but the rest do — particularly for those struggling to survive on depleted retirement savings they were unable to replenish, or for those still attempting to build up accounts so that they can retire at some point.
It’s not just the U.S. suffering from the lingering effects of the crash/recession. The letter says that while “[t]he 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,” the U.K. and European economies are also trailing where they would have been, had the financial crisis and Great Recession not intervened.
The report cites a 2017 study that examined a panel of countries in the Organization for Economic Cooperation and Development and found “that gross domestic product is typically about 9 percentage points lower five years after an extreme financial crisis.”
Not only do data indicate that actual U.S. GDP is running about 12 points below where it would have been had the crisis not occurred, but that GDP isn’t likely to recover to that extent.
There’s an asymmetric relationship, the letter says, between the damage done by an adverse financial shock to a thriving economy and the potential for a restoration of health to an economy in recession by the presence of favorable financial conditions. In other words, a healthy economy will fall farther when shocked than a poor one can rise when presented with growth conditions.
And because the losses incurred in the wake of a financial shock “are very persistent,” the report says, “they can have dramatic effects on societal welfare and important implications for policy.”
It’s important, therefore, that research and policy should address the question of how to prevent or contain future financial crises.
Just ask any $70,000-poorer American.