What is a good estimate for the total domestic economic cost of all
the recent corporate scandals? From Enron to Worldcom and all of the
others. Has anyone put a dollar amount on the damage to the US
economy?Hi! Thanks for the question.
The economic forum entitled “Cooking the Books” made such an estimate.
The website where the transcript of the presentation is located is
unavailable right now but fortunately for us, Google saved it in its
cache.
“Cooking the Books”
http://216.239.53.100/search?q=cache:k8aUyw6EQTAC:www.brook.edu/comm/events/20020904.htm+estimate+economic+cost+%22corporate+scandals%22&hl=en&ie=UTF-8
One version of the transcript I found shows that it could slash GDP
levels by $35 billion. Here is an explanation on how they arrived at
the figure.
“First of all in terms of the cost, I think it's important to note
that it's very difficult to assess these in any kind of precise
manner. What we opted to do was to take a very narrow focus and
estimate the cost of the loss in stock market wealth on consumption
and investment. This means we have not accounted for other possible
costs such as supply side disturbances related to the collapse of
several large companies or the economic cost of inefficiency related
to corporate reliance on core information and distorted consumption
and investment patterns. Our assessment is based sole on the effects
of losses in stock market wealth on consumption.”
“Anyway, the Dow dropped 25 percent from its March 2002 peak to July
19th and the market yesterday closed at levels very close to the July
19th level so at least in terms of today's event we've picked a good
day.”
“In any event, in the absence of other causes of stock market decline
we assumed that part of the drop in the stock market value since March
can be attributed to the corporate scandals. Our base case assumption,
and there are a range of assumptions in the paper, but our base case
assumption is 17 percent of the loss in stock market wealth attributed
to the scandals, and in the paper in detail we arrive at or near this
figure a number of different ways so we think it's a realistic,
possibly conservative estimate.”
“We then calibrate to the Feds model of the U.S. economy, which
assumes that each dollar of stock market wealth results in .35 percent
additional consumption, or 3.5 cents on each dollar. The reverse is
true with losses in wealth. Using the Feds model and the loss based on
the market value at its July 19th close, GDP would be reduced by
approximately $35 billion, or .34 percent over the first year.”
“A Brookings National Issues Forum”
http://216.239.53.100/search?q=cache:VRXwI2trzXoC:www.brook.edu/comm/events/20020904.pdf+estimate+%22economic+cost%22+%22corporate+scandals%22&hl=en&ie=UTF-8
Another version of the report could be found here with slightly
different figures shows that such scandals could be within an
estimated range of $21 to $50 billion damage to the GDP.
“Using our three sets of assumptions about the percentage decline in
stock market wealth that can be attributed to Enron and subsequent
accounting episodes, the Fed's model suggests that if stocks stay at
their July 19 levels and without offsetting fiscal or monetary
stimulus, GDP would be reduced (because of a drop in both consumption
and investment) by between .2 and .48 percent (between $21 and $50
billion off current GDP) over a one-year period, between .40 and .95
percent after two years, between .50 and 1.19 percent at the end of
three years, and between 1.05 and 2.50 percent over a ten-year period.
These estimates do not take into account possible longer term
supply-side disturbances—those that affect prices or
production—related to the collapse of several large companies. Of
course, should the market turn around—and eventually it should and
will—these adverse effects will be reversed. But for now, the
estimates suggest that the cumulative impact of the scandals on GDP is
significant.”
“Cooking the Books: The Cost to the Economy”
http://216.239.53.100/search?q=cache:0pLx4V3I3egC:www.brook.edu/comm/policybriefs/pb106.htm+estimate+economic+cost+%22corporate+scandals%22&hl=en&ie=UTF-8
Search terms used:
estimate economic cost "corporate scandals"
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Easterangel-ga
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January 9th, 2009, posted by wktd
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