The Great Recession cost plenty. And it is still costing.
As we grimly mark the fifth anniversary of the collapse of U.S. investment bank Lehman Brothers that kicked off the global financial crisis, the mind-boggling numbers are being tallied. It is apparent that the costs are not just high, but also encompass scores of areas beyond the direct costs of the downturn.
In a paper for the Dallas Federal Reserve, economists David Luttrell, Tyler Atkinson and Harvey Rosenblum calculate that the total cost to the U.S. of the financial crisis was something in the order of $6-trillion (U.S.) to $14-trillion. The top end of this range represents one full year of U.S. economic output. If they were to add in what they call "broader" measures that reflect the lingering trauma of the recession, they figure that the actual cost could be twice as high.
What are they including as costs? Well, to start, they look at "what would have been." Looking at the trend in growth pre-recession, they extend it out and compare that scenario to the reality, and look at the gap. That's the $6-trillion to $14-trillion figure, and is actually the lowest measure of the cost of the crisis. (The wide range reflects a couple of different scenarios. One assumes that the economy makes up for lost time over the next several years and rebounds back to the pre-recession trend. The other assumes that it never recovers its lost momentum, and remains operating at a lower capacity.)
There are scores of other things you can add to that, however.
From the loss of wealth (in housing and the financial markets), to the loss of wages (those lost through the crisis, as well as the loss of earnings potential because of employment disruptions), to the opportunity cost of government money spent on bailouts that did not get used someplace more productive, there were gigantic costs associated with the recession. Then there are the psychological costs: The stress that comes with unemployment, as well as the stress on those who did not lose their jobs but worried a lot about whether they would. And that's all without even quantifying the loss of optimism that still haunts the U.S. and much of the world five years after the crisis – a factor that plays a significant role in the willingness to spend and invest.
And let's not forget that the financial crisis hit a lot more countries than just the United States. In Canada's case, the unemployment rate never spiked as high as our neighbour, nor did we see the same loss in value in the real estate market. Even so, five years later a startling number of Canadians will still tell you that the economy is slow, or actually believe that it is still in recession. That attitude no doubt is still weighing on the economic choices they make, and their expectations for the future.
So can we learn much from counting up the costs? Well, the fact that allowing financial crises to happen is so expensive should give us added incentive to make sure they do not happen again. There are scores of analysts and academics who this week are pondering the "lessons of Lehman" and what could-have-should-have happened to have avoided it. Hopefully in their research they come up with something concrete that ensures that we do not again create the conditions for a breakdown of the system that keeps costing even years after things are purportedly fixed.
Linda Nazareth is the principal of Relentless Economics Inc. and a senior fellow at the Macdonald Laurier Institute.