What's a depression?
Question: You may have answered this already, but what is the difference between a recession and a depression? With daily news of layoffs, unemployment rates, home foreclosures, and the lack of jobs available, it seems like we're in a depression to me. How long will this last? And how are we going to get out of it. How can we jumpstart the economy? These are really scary times. Thanks. Joeth, Lincoln, NE
Answer: These are scary times. A recession is typically defined as at least two quarters of consecutive decline in gross domestic product. Recessions are dated by a group of scholars with the National Bureau of Economic Research, and this downturn is now more than a year old. What would turn it into a depression, besides the old quip a recession is when your neighbor loses her job and a depression is when you lose yours? There is no general agreement.
Richard Posner, the federal judge and University of Chicago scholar, recently said he believes we are in one: "I suspect that we have entered a depression. There is no widely agreed definition of the word, but I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and a sense of crisis."
Of course, we're still far from breadlines snaking around city blocks or Hoovervilles set up outside city limits, visible, tragic signs that more than a quarter population unemployed and over a third if including those working only a few hours a week during the Great Depression. Louise Armstrong, a social worker in Chicago and later a relief administrator in a Michigan County during the New deal, recalls "One vivid, gruesome moment of those dark days we shall never forget. We saw a crowd of some fifty men fighting over a barrel of garbage that had been set outside the back door of a restaurant. American citizens fighting for scraps of food like animals!"
Several years ago, Nobel laureate Ed Prescott and economist Timothy Kehoe defined a great depression as a sustained drop of 20% or more in the economy. They were studying depressions in the latter part of the 20th century, including Mexico and New Zealand. We're still a long way from a depression by this metric.
The best definition I've come across was devised by University of California economist Brad DeLong. It's a chilling definition. A depression is when the unemployment rate breaches 12%, or stays above 10% for three years.