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FED: 2007-2009 Recession Cost Each American $7,300 in Foregone Consumption


The Federal Reserve Bank of San Francisco has released a report quantifying what the Great Recession has cost Americans over the last few years:

"The Great Recession of 2007-2009, coming on the heels of a spending binge fueled by a housing bubble, so far has resulted in over $7,300 in foregone consumption per person, or about $175 per person per month. The recession has had many costs, including negative impacts on labor and housing markets, and lost government tax revenues. The extensive harm of this episode raises the question of whether policymakers could have done more to avoid the crisis."

The report was written by senior economist Kevin Lansing reflecting on the period from December 2007 to May 2011, and the $7,300 per person number was calculated by comparing the inflation-adjusted path of consumer purchases to pre-crisis levels.

In a Bloomberg Businessweek interview Lansing states that the purpose of the paper was to give an idea of how much stimulus was coming from the housing bubble. Lansing:

"People are wondering why consumer spending is so slow these days. What they should be asking is: Why was it so strong in previous years? You’re comparing it to an artificial economy that was driven by debt."

Lansing states that using interest-rate policy rather than regulatory actions "may have a distinct advantage" in bursting asset bubbles to avert a repeat financial crisis.

"Many have argued that a central bank’s interest rate policy is too blunt an instrument and that regulatory policy is better suited to restraining bubbles. However, regulatory policy may not be a magic bullet. Unfortunately, regulations put in place after a crisis to prevent bubbles are often relaxed as complacency sets in, opening the way for the next bubble (see Gerding 2006). Interest rate policy may have a distinct advantage because vigilant central bankers can deploy it against bubbles regardless of the regulatory environment."

Lansing's report also compares the prolonged severity of the current recession to past crisis:

"Figure 1 compares the trajectory of monthly real personal consumption expenditures per person during the Great Recession with the corresponding trajectories for the two prior recessions of 2001 and 1990–91. The 1990–91 recession was triggered by the combination of an oil price shock and a credit crunch (see Walsh 1993). It took 23 months for consumption per person to return to its pre-recession peak. In contrast, as of May 2011, 42 months have elapsed since the start of the Great Recession and consumption per person is still 1.6% below its pre-recession peak."

Lansing points to declines in household net worth, increases in savings, reduction in lending that fueled past spending and slowed population growth to be the causes for this recession's drop in consumption.

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