The credit crunch: bad for your pocket, worse for your psyche

It will soon be a year since Lehman Brothers filed for bankruptcy. And two years since the queues began to form outside branches of Northern Rock. The Financial Times felt obliged to pen a defence of markets, before soliciting views on the future of capitalism.

Now that we are no longer staring over the precipice, wasn’t this all just a little excitable? Perhaps not. New research suggests that the crisis may shape the psyche of a generation, even if the crisis now passes quickly.

The evidence comes from economists, Paola Giuliano of UCLA Anderson School of Management and Antonio Spilimbergo of the International Monetary Fund. Giuliano and Spilimbergo rely on answers to the General Social Survey, which has been conducted in the US almost every year since 1972. Because each survey participant has an identified home region, Giuliano and Spilimbergo can compare survey answers with the economic performance of the region in question. (The regions are large: the US is divided into nine.) Regional economic performance can be choppy, so the researchers looked for outliers: when regional growth fell into the bottom 5 per cent of all regions and all years in the sample, the researchers counted this as a severe regional recession. This turned out to be a year in which the regional economy shrank by 3.8 per cent or more.

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Tim Harford’s blog

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Tim, also known as the Undercover Economist, writes about the economics of everyday life.