On the Aggregate Welfare Cost of Great Depression Unemployment

Abstract

The potential benefit of policies that eliminate a small likelihood of economic crises is calculated.An economic crisis is defined as an increase in unemployment of the magnitude observed during the Great Depression.For the U.S., the maximum-likelihood estimate of entering a depression is found to be about once every 83 years.The welfare gain from setting this small probability to zero can range between 1 and 7 percent of annual consumption in perpetuity.For most estimates, more than half of these large gains result from a reduction in individual consumption volatility.

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