"We are in a depression."
Probably posted here last week, but worth repeating.
We ended the Great Depression with a great program of government spending for an unfortunate reason. It was known as World War II…but when the war broke out in Europe, and we began our buildup that Great Depression that had been going on for ten years. People thought it would go on forever. Learned people stroked their chins and said there are no quick answers. In two years, employment rose 20%. That’s the equivalent of 26 million jobs today, the depression was over. We had full employment, and it never came back, or it didn’t come back until 2008, because people managed to pay down those debts, and we had a durable recovery.
Paul Krugman on Real Time with Bill Maher 5/25/12
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to
Soupy Sales
WXYZ TV
Detroit
Soupy actually did that once.
just keep one foot on the floor while you go to sleep. 
Krugman is, after all, an economist and we know how he uses the term.
There isn't any universally accepted economic definition. There have been definitions suggested that require a contraction in GDP of 10%+ and a recession lasting more than two years, but that is not universally accepted.
Unlike recession, depression is more a category than a statistical thing. It is, to my way of thinking (and Krugman's apparently) defined by it behavior, not only in terms of intensity.
A business-cycle recession holds the seeds of its own recovery in inventory depletion and inventory rebuild. But if demand is consistently depressed there is no intrinsic path to recovery.
I would say a big drop-off that does not "bounce" off a bottom and that changes psychology long-term, changing the populaces economic expectations fundamentally, is not merely a recession.
A prolonged economic downturn that is not a typica; business-cycle recession is, to my way of thinking, a sort of depression. A depression has to be bad to be worth the name, but can be more or less severe.
Was Japan's "lost decade" a depression? It had the crash of a stock bubble and a housing bubble followed by a decade of near-deflation (and sometimes deflation itself) and was immune to conventional notions of monetary and fiscal stimulus. That sounds like a version of what the Great Depression was about... but less than "Great."
The 1930s was "The Great Depression," which strongly suggests that most depressions are less severe than the 1930s. There were a lot of depressions between the Civil War and WWII, and people saw the 1930s as a big version of an already identified sort of event. Hence "The Great." (I would guess the term came from the practice at the time of calling WWI "The Great War"
Since there is not a universal statistical definition, and since this global event shows no signs of recovering the ground lost and since the UK is currently in recession several years after the event in 2008, and the eurozone very nearly so, and since the event may well lead to the break-up of the eurozone, and since the economy ad jobs are the top issue in US politics coming-up on four years after the Lehman brothers failure...
We have to call this thing something, and it isn't just a recession, of the sort any of us have seen.
The Fed-induced recession of 1981-1982 was a comparable short-term shock in the US, but then bounced back hard with GDP quarters of almost 10% annualized. We haven't seen a single quarter like that and nobody predicts we will.
Whatever we call this thing, it is a type of prologued event that changes all the rules.
Last edited Thu May 31, 2012, 07:22 PM - Edit history (2)
It sounds like the 10% depression rule was widely taught at some point, and perhaps it still is. I don't know. My impression (which may be wrong) is that most economists do not use any numerical defintion today. If it has faded I support the change because such a statistical rule encourages us to think of recession and depression as points on a continuum, like tropical storm and hurricane.
But they are different animals. I would say that recessions are weather, whereas a depression is climate. All depressions will begin with a recession but few recession lead to depression.
When this thing started people were looking to 1981-1982 for the most comparable recession, because that was the sharpest since the Great Depression. And that comparison had unfortunate effects.
For instance, we can deduce from policy that the Obama administration assumed that the crash of 2008 was a comparable event to 1981 and that Obama would be running in 2012 on "Morning in America' just like Reagan in 1984. And Europe thought the same way, but moreso.
But the initial conditions were radically different.
The 1981 recession was induced by Paul Volker to wring inflation out of the economy. Jack the fed funds rate up to 19% until the economy stops and then you have an amazing 19 points of monetary stimulus available to restart it. You can see that the Fed Funds rate was decreased ten points during that recession.
Our recent recession, on the other hand, happened in an already low-inflation environment. The Fed was only able to reduce that rate 4-5 points before hitting zero.
The very same initial GDP drop or unemployment increase in those two environments will play out very differently.
The GHW Bush recession that put Clinton in office was created by Iraq invading Kuwait. By the time that shock worked through the system we had already beat Iraq and come back home... and then the recession came. Ironic for Bush.
That was the product of uncertainty and a commodity shock in oil. The 1981 recession was a product of monetary policy. The Great Depression was the product of a bubble collapse. (The stock market, in 1929). With different origins we shouldn't expect similar results. Bubble collapses tend to take down whole economies.
For some reason, bubble collapses are harder on employment. The market crash of '29 lead to a decade of low employment. The burst of the internet bubble led to Bush's jobless presidency. (Despite incredible levels of fiscal stimulus) And the collapse of the housing market lead to our current job-weak world, without ever recovering from the internet bubble in between.
I would say a depression is the condition you can get from a type of big recession that is not self-repairing (unlike a business inventory cycle or monetary policy or temporary commodity shock recession) and that simple GDP will not identify the difference.
Depressions feature basic psychological changes in the economy. People do not assume a recovery and that becomes a partially self-fulfilling prophecy. In a usual recession half the players are positioning themselves to profit on the recovery. But sometimes the players go hide in a cave.
And I suspect that bubble collapses have a uniquely negative effect on that psychology. Things that were the pillar of the economy a year ago are now trash. We lose trust in the economy itself.
The Japanese lost decade began with a dual collapse of the stock market and housing market.
Are depressions always products of bubble collapse? I don't know, but if so that would be a useful part of a definition.
occasion! 
I guess I see recession and depression as different contiguous regions (not points) on a continuum, that continuum being annual growth (or contraction) of GDP.
That said, your point about how they are different beasts is one I had not fully considered before now and I think I'm going to have to modify my thinking to take that idea into account.
On a personal level, it sure feels like a depression (unemployed for > 75 weeks and no prospects in sight) and California is still suffering badly, with an official state unemployment rate around 11%, meaning the reality is probably closer to 20%.
Thank you very much for the detailed and thoughtful discussion. Such is more often the exception in these parts than the norm these days
