As a result of the Great Recession, the average American household will have lost between $50,000 and $120,000 in earning potential, according to a letter from the Federal Reserve Bank of Dallas.
Those figures assume that the country’s economic output eventually returns to its pre-recession trend path. The estimated loss nationwide is between $6 trillion and $14 trillion, and the Dallas Fed partially attributes that wide range to uncertainty of how long the recovery will take.
The letter also notes the losses could be greater than $14 trillion — possibly twice as much — when accounting for the psychological impact on Americans and if the crisis permanently lowers the path of future output, in comparison to other post-recession rebounds.
In addition to lost earning potential, U.S. households’ net worth declined $16 trillion from the third quarter of 2007 to the first quarter of 2009 — a 24% dive. However, the Fed says it’s more difficult to quantify how the pain of the economic downturn will linger in the minds of Americans —and furthermore, how it could impact their consumer behavior.
The Larger, Lasting Effects?
Further losses could result from the psychological effects of stress, reduced job security and unemployment-induced declines in self-worth. The letter mentioned other losses of human capital, including reduced economic opportunity and skill atrophy among the jobless and underemployed, as well as the economic impact of a lost public trust and cost of government intervention in the economic crisis.
The high end of the loss estimate ($14 trillion) is nearly as much as the country’s annual economic output, and lingering trauma may lead to the equivalent of two years’ foregone consumption, the Dallas Fed said.
To prevent future economic crises and consumer adversity, the Dallas Fed made a recommendation:
“Given this range of estimates, the tepid economic recovery and the collateral damage sustained, it is crucial to implement effective policies that avoid future episodes whose magnitude could exceed even the staggering costs and consequences of the most recent financial crisis.”