In theory, it is very possible to be sanguine about the cost of financial collapses, whether triggered by irresponsible private risk-taking or irresponsible public borrowing. A smart reader points out why: “Fiscal problems are basically problems of social organization … putting the last point another way, bankruptcy does not destroy actual physical assets, land or human capital. It does damage trust, as the part of the social fabric embodied in the debts so vacated is shredded. But it leaves the existing productive assets intact, and trust can return quite quickly.”
This is a sensible theoretical prediction. The problem is that there is evidence from the IMF that strongly suggest that the prediction is incorrect. Recessions associated with financial collapses appear to permanently lower the trend rate of growth; the lost output is not regained even ten years later. Samuel Brittan has more.
Since nothing is blown up in a recession, the suggestion is that the psychological effects can be long-lasting. Economies don't invest more once the recession is over to make up for lost time.
Of course, there are counterexamples: Mexico in 1994, and Argentina returned to rapid growth after 2002. In addition, the economy could probably do fine with a long-term inflation rate around 4 percent, which could do a lot to reduce past debt burdens as long as future borrowing stayed under control. So perhaps the United States need not worry about our long-term fiscal problems.
Never predict, especially about the future.