The U.S. economy has still not fully recovered from the recession a decade ago, a new study says, and because of it the average American will miss out on about $70,000 in lifetime income.
The report by the Federal Reserve Bank of San Francisco, released Monday, found “the U.S. economy remains significantly smaller than it should be based on its pre-crisis growth trend,” and that lost ground may never be recovered.
“One possible reason lies in the large losses in the economy’s productive capacity following the financial crisis. The size of those losses suggests that the level of output is unlikely to revert to its pre-crisis trend level,” the report said.
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In figuring out the reasons for the lost output, the researchers said that the effects of financial markets on the economy is asymmetrical — that is, a financial shock will slow down economic growth in good times, but in bad times, favorable financial conditions won’t necessarily stimulate economic activity.
“Without the large adverse financial shocks experienced in 2007 and 2008, the behavior of GDP would have been very different. 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,” the report said. “This behavior is in stark contrast to actual GDP, which has not reverted to its pre-crisis trend level.”
Also see: Are you and your retirement funds ready for the next recession?
The recession lowered output so much — about 7 percentage points deeper than in a mild recession— and for so long, that the average American will take a $70,000 hit to their income over their lifetime. To come up with that figure, the Fed study took the GDP-per-person reading from 2007 — about $50,000 — and assumed an annual 5% discount rate.
“Financial market disruptions can have large costs in terms of societal welfare by causing persistent losses in the level of GDP,” the study concluded.
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