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According to the Bureau of Economic Analysis, in the second quarter of 2011 the United States produced goods and services at a $15 trillion annual rate (Table 1.1.5). The Congressional Budget Office, meanwhile, figures that the economy was then capable of producing $16 trillion per year. This implies a loss of $250 billion income over just three months.
From October 2007 through June 2011, the difference between what Americans might have produced and what they actually produced has a total value of $3.21 trillion. Amazingly, CBO projects that there is another $2.56 trillion in lost income yet to come over the next five years. That is, if CBO’s projections come to pass, we will have foregone income of $5.78 trillion over the course of the recession.
Of course, much of that $5.77 trillion in lost income is lost labor, so this implies a lot of time off work for a large number of people. Sadly, we have not traded up nearly $6 trillion for time to sunbathe and snow-ski. This “time off” is due to unemployment, not vacation.
Unfortunately, this is not the full story. According to Doug Elmendorf, Director of the CBO, “Combining estimates of the effects on capital accumulation, potential hours worked, and potential total factor productivity, CBO projects that potential output will be about 2 percent lower, on average, between 2017 and 2021 than it would have been without the financial crisis and the recession.”
By contrast, CBO projects a 75-year shortfall in Social Security of only 0.58 percent of GDP. The recession has cost the United States three and a half times this amount.
In fact, if we go back to CBO’s projections four years ago—just prior to the recession-- real potential output in 2017 was projected to be 4.7 percent higher that is projected today—a difference of eight Social Security shortfalls! That is, CBO’s ten-year estimate of potential output has fallen by $6.44 trillion since the onset of the recession. If only 40 percent of the fall in potential output is attributable to the recession, then the recession will cost more than $8.3 trillion in lost output through 2017. It is as if the entire U.S. economy took six months off.
Perhaps some of this will enter into policymakers thinking the next time a multi-trillion-dollar bubble comes around.