Posted: 3/2/2009 7:09:35 PM EDT
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Is it finally time to use the dreaded D-word?
Even as there is talk of a depression, no one can define exactly what that is updated 2 hours, 56 minutes ago WASHINGTON - A Depression doesn't have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase "d." And it may be happening now. The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn't been one since the epic hardship of the 1930s. But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way. "We're probably in a depression now. But it's not going to be acknowledged until years go by. Because you have to see it behind you," said Peter Morici, a business professor at the University of Maryland. No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call. Declaring a depression is much trickier. loose talk THE D-WORD Some views from Washington over the years on the difference between a recession and a depression: RONALD REAGAN: "A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his." That was candidate Reagan's characterization of the economy in 1980, when he defeated incumbent Carter for the presidency. CARTER ECONOMIC ADVISER ALFRED KAHN: "We're in danger of having the worst banana in 45 years." Kahn, a top economic adviser to Carter, irked the White House when he warned in 1978 that rampaging inflation might lead to a recession or "deep depression." Asked by presidential aides to use other words, Kahn promised to substitute the word "banana." ECONOMIST ALLEN SINAI: "I'm defining `depression' as much deeper, sharper declines in major measures of U.S. economic activity, including jobs, than typically have happened in the deep recessions of 1981-82, 1973-75 and 1957-58. What's very striking here and what gives me concern is the speed of the declines, half a million jobs a month." Sinai is founder and chief global economist for Decision Economics, a Boston-area forecasting firm. ECONOMIST PETER MORICI: "My definition of a depression is a slump, or downturn in the economy similar to a recession, that does not self-correct. We've had three of those: two in the 19th century and the Great Depression. A depression doesn't have to be 25 percent unemployment. It can be 12 percent unemployment for 12 years." Morici, former chief economist at the U.S. International Trade Commission, is a business professor at the University of Maryland. ECONOMIST DAVID WYSS: "You look at what's going on out there, and this is clearly going to be the biggest recession we've had in the postwar era. But does that make it a depression? Or just a recession? To me, if you look at the Great Depression, you're looking at a 25 percent unemployment rate, an extended period, basically four years of decline followed by very little recovery." Wyss is chief economist for Standard and Poor's, a New York-based financial rating service. ECONOMIST BRUCE BARTLETT: "Well, there's no formal definition of depression. But I think maybe when history is written, we'll look back on this situation with the benefit of hindsight. And I think that (another depression) is a definite possibility. I'm not willing to say so right today, but this is unquestionably the most severe downturn we've had since the Great Depression." Bartlett was a top Treasury official in the Reagan administration and a top Treasury official in the first Bush administration. By one definition, it’s a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn’t qualify yet: 15 months old and 7.6 percent unemployment. But both unemployment and the 6.2 percent contraction for late last year could easily worsen. Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now. Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit. Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week. The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust. And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression. Is it finally time to use the dreaded D-word? Few economists expect this downturn will be the sequel. But nobody knows for sure, and nobody can say when or whether the downturn may deepen from a recession to a depression. In his prime-time address to Congress last week, President Barack Obama acknowledged "difficult and trying times" but sought to rally the nation with an upbeat vow that "we will rebuild, we will recover." The next day, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the "recession is serious, financial conditions remain difficult." He held out a best-case hope that it might end later this year, with "full recovery" in two to three years. Despite the tempered optimism, the economic outlook remains grim. Consumer confidence has fallen off the table, stocks are at 12-year lows, layoffs come by the tens of thousands, and credit remains tight. |