The word “depression” has been popping up in the media very frequently in the context of the current economic downturn. But, there is no definition for a depression other than the old adage that, “A recession is when your neighbour loses his job. A depression is when you lose yours.”
Before the 1930s, it was common to refer to all economic downturns as depressions. The term “recession” came into use when politicians started to employ spin doctors to find less a threatening word that didn’t remind people of the unpleasantness of the 1930s.
Defining a Depression
In its December 30, 2008 issue The Economist reported on a comprehensive Internet search for the defining characteristics of a depression. What the editors came up with was that a depression is “a decline in real GDP that exceeds 10%, or one that lasts more than three years.”
Obviously, the Great Depression of the 1930s qualifies as U.S. Gross Domestic Product fell by 30 percent between 1929 and 1933. At 43 months, wrote The Economist “it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months.”
Depressions Have Hit Several Countries
During the 1990s, Japan went through a period of prolonged economic troubles; what is known as “The Lost Decade.” However, harsh though that spell was, The Economist says it was not a depression, “…because the largest peak-to-trough decline in real GDP was only 3.4%, over the two years to March 1999.”
The magazine says the only developed economy to suffer a depression since the Second World War is Finland. Its economy “…contracted by 11 percent during the three years to 1993, mainly thanks to the collapse of the Soviet Union, then its biggest trading partner.”
Developing economies, such as those of Poland, Argentina, Indonesia, and Malaysia have all suffered double-digit drops in economic output over the past couple of decades.
The Economist’s analysis excluded production collapses brought about by war, such as those that hit Germany and Japan in the 1940s.
Bursting Speculative Bubbles Cause Depression
Saul Eslake, chief economist at Australia’s ANZ Bank, suggests a depression should be defined more by what causes it than how long or deep it is. By Eslake’s criteria a depression comes after the bursting of an economic bubble.
The respected American economist Robert Reich would agree. On his blog (April 03, 2009) Dr. Reich wrote: “This is still not the Great Depression of the 1930s, but it is a Depression.”
It was triggered by the bursting of the U.S. housing bubble that was inflated by handing out initially low-cost mortgages that many who got them could not afford. When the value of their biggest asset began dropping huge numbers of Americans became spooked. “This broader anxiety,” wrote Reich, “expresses itself as less willingness to spend money on anything other than necessities. And this reluctance to spend further contracts the economy, leading to more job losses.”
Perhaps, after this recession/depression comes to an end, economists will be able to agree on what to call it.
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