US economy still haunted by the Great Recession 10 years later

REUTERS/Robert Galbraith

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 $70,000 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.

Federal Reserve Bank of San
Francisco

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 behavior 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.”

Federal Reserve Bank of San
Francisco