There has been a great deal of discussion about whether we are presently in a recession or a depression. Let’s first examine the difference between the two. A recession refers to a general slowdown in economic activity over a sustained period of time. It is seen as a normal downturn in the business cycle. The GDP (Gross Domestic Product), employment, investment spending, household incomes and business profits all fall during recessions. Whereas, a depression is a sustained, long, downturn in one or more economies. A rare and extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Deflated prices or severely inflated prices are also common elements of a depression.
That said, let’s consider the questions that Chris Isidore addressed in his article on CNNMoney.com. How does the present economy compare to the Great Depression? And is it likely that the economy will fall into another depression?
Our economy witnessed a serious recession in the mid-1970s and in the early 80s. But this recession is the worst since the Great Depression. This recession has lasted twenty months, so far, compared to the sixteen months which occurred during 1973-75 and 1981-82. Every single state has reported a rise in unemployment, which is the first time this has happened in the thirty-two years unemployment records have been kept nationwide. On top of that, 86% of industries have cut back production since November, and in the past nine months the wealth in households has dropped more than any time since after WWII.
Why isn’t this considered a depression? The U.S.’s GDP has fallen to about 1.7%, and over the life of the recession should average about 3.4%. Although this would be the worst drop since WWII it is a long way from the 26.5% fall in GDP that occurred between 1929 and 1933. Yes, the net worth of households has fallen drastically during this recession, but the broader economy can weather the shock. Major changes in policy keep money moving in the economy in ways that weren’t in place during the 30s. A paper written by Harvard Professors R. Barro and J. Ursua concludes that the chance of a minor depression is approximately 20% and a major depression is approximately 3%.
All in all, the economy is in better shape than is often portrayed by the media.
