The difference between a recession and depression has been described as "A recession is when your neighbor loses his job. A depression is when you lose yours." For the ordinary American, answering the question about the difference between the two is not that simple.
Recession DefinitionSome economists define a recession as two consecutive quarters of economic contraction, or a decline in real gross domestic product (GDP), according to Jessica Ramirez, "Exactly How Bad is It?: The Difference Between a Recession and a Depression" (Newsweek, 10/16/08).
According to the National Bureau of Economic Statistics ((NBER), a recession occurs when a significant decline in the economic activity is spread across the economy, lasting more than a few months, normally visible to real GDP, real income, employment, industrial production, and wholesale sales. The one marker that seems to be consistent is unemployment.
Depression Definition
A common unofficial definition for a depression refers to a deep and prolonged recession in which the GDP declines by more than 10 percentage points. That was certainly the case when the GDP dropped by more than 30 prcent from 1929-1933, with employment peaking in 25% in 1933. Robert J. Samuelson asks "Is This a Replay of 1929?" (Newsweek, 10/13/08) writes that there are some similarities and differences between than and now. The similarities between them include that Americans borrowed heavily before the crisis---in the 1920s, for cars, radios and appliances and in the past decade, for homes with inflated values.
According to Samuelson, the differences is that the federal government is now a huge part of the economy (20 percent vs 3 percent in 1929) and its spending---for Social Security, defense, roads, provides greater stabilization.
Recessions Become Depressions
Recessions become depressions when the government makes the wrong decisions as to how to deal with it. According to James Pethokoukis, "4 Ways to Turn a Recession into a Depression (U. S. News 11/4/08), there are ways that good and bad policy can effect an economic downturn:
Bank closures
Although the American taxpayer may well have to provide what is being called, "the mother of all bailouts" the Federal Reserve has already committed $7 billion to prevent the collapse and run on the banks. It has also raised the federal deposit insurance (FDIC) from $100,000 to $250,000 to discourage shaking depositors from withdrawing their cash.
Raise taxes:
The Revenue Act of 1932 increased the top rate from 25 percent to 63 percent. Economists agree this is one of the dumbest things that Herbert Hoover did and there are signs that this could be repeated in 2009.
Unnerve business: Raising uncertainties with the business community are questions about whether the Bush tax cuts will be extended, will health care be nationalized, will carbon emissions be taxed, the capital gains increased?
Start a trade war: Raising tariffs is one of the reasons blamed for the Great Depression of 1929. A weak economy in 2009 might provide more momentum for protectionists on Capitol Hill.
Pethokoukis answers the question as to how to improve the economy (and prevent a recession from turning into a depression). Cutting taxes, avoiding hastily prepared new regulations, and reforming the entitlement system which would restore the faith of international investors and governments.
 |
