are enormous, even if they are not easily quantifiable.Nonfarm payrolls fell by more than8.7 million, or 6.3 percent, and thenumber of unemployed climbed to 14.7million over the course of the recession,peaking at 10 percent of the nation’s laborforce in October 2009. Further, many workers faced extended bouts of unem-ployment or left the labor force alto-gether. The ranks of the underemployed(those who want a job but can only findpart-time work) and frustrated job seek-ers (those who become discouraged andgive up looking for work) rose to 12 mil-lion, a 94 percent increase. In July 2013,four years after the recession is deemedto have ended, labor underutilizationremains intractably high: 11.5 millionpeople are unemployed and an addi-tional 10.6 million are underemployed orfrustrated.Branches of economics that survey broader measures of life satisfactionapart from income have confirmed theintuition of the nonpecuniary costs of unemployment—for example, the psy-chological effects of stress and feelings of diminished self-worth.
In addition, high-er unemployment has spillover effects onthe rest of society: decreased job security for the employed as well as higher taxesto fund the transfer payments to the job-less and the underemployed. While thepsychological toll of a weakened econo-my may be small for employed workersrelative to the unemployed, the aggregatesocietal consequences can be significant.
Although subjective well-being canbe hard to quantify, one study estimateda cost of as much as $14 trillion from lossof security in the workforce due to risingunemployment.
This figure representsthe lost income of the unemployed, the value of the loss of subjective well-beingamong the unemployed and the nega-tive spillover effects on the employed,including the adverse effects of highunemployment on future income and jobprospects. A job is a path to dignity and a senseof accomplishment that is paramountto personal progress. Optimism regard-ing perceived opportunities—the notionthat the future will be better than thepresent—is a crucial source of motiva-tion for job seekers and job keepers. Thecrisis deflated this sense of security andoptimism for many—reflected in a down- ward revision to households’ permanentincome, some of the decline in the laborforce participation rate and a slower paceof household formation observed from2007 through 2011. Individuals changethese behaviors when they reassess theirmedium- and long-term prospects anddo not like what they see. A stark legacy of the recession andthe lackluster labor market is reducedopportunity and deterioration capturedin subjective measures of well-being.Since the recession’s onset in December2007, more citizens believed their income would be lower in the future than thoughtit would be higher. This is the first time in
recession since the 1960s that incomeexpectations turned negative.
The crisis resulted in a significant lossof trust in government institutions andthe U.S. capitalist economic system. Inthe Fraser Institute’s Index of EconomicFreedom global ranking, the U.S. fell fromsecond in 2000 to 18th in 2012. The assess-ment by the economics and public policy think tank is based on 42 variables thatinvolve aspects of government size, prop-erty rights, money soundness, interna-tional trade freedom and regulation.
Thelower ranking reflected perceptions of less-secure property rights, bigger government,increased regulation of businesses andfavoritism accorded to special interests. A crisis of confidence portends aloss of public trust. Saving the systemfrom complete collapse—especially withextraordinary government assistance,including bailouts to a handful of giantfinancial institutions—reinforced a per-ception that public support exists primar-ily for large, interconnected, complex financial entities. Deemed “too big tofail,” these financial intermediaries lackeddiscipline and accountability leading upto the crisis and proved largely immuneto the downside of their excessive risk tak-ing. This special treatment violated a basictenet of American capitalism: All peopleand institutions have the freedom to suc-ceed and also to fail based on the meritsof their actions. In a way, the 2008–09bailouts exacted an unfair and nontrans-parent tax upon the American people.
Although unprecedented fiscal andmonetary action in the throes of panicduring 2008–09 may have prevented afull-blown depression, such interventiondid not come without significant costs.Society must deal with the consequencesof a swollen federal debt, an expandedFederal Reserve balance sheet andincreased regulations and governmentintervention for years to come. Directgovernment support for the U.S. finan-cial sector totaled approximately $12.6trillion, or more than 80 percent of 2007GDP—a sum over and above what wasprovided via precrisis Federal DepositInsurance Corp. deposit insurance lim-its and the Federal Reserve’s traditional
ouu l I lag evn wih oiiic Fca
ra GDp, iin f 2009 da
Output lossfrom oil shock:$2.1 trillionOutput lossfrom ﬁnancial crisis:$11.7 trillionTrend (constant GDP per capita growth)Oil-shock-induced recessionActualBlue Chip consensus forecastsForecast return to trend
soUrCes: buau f ecnic Anayi; Cnu buau; bu Chi ecnic Indica; auh’ cacuain.