Although we had the largest and deepest financial shock since 1929, many analysts are claiming the odds of a depression are less than 50-50. Although there is not a consensus definition for “depression,” Harvard University economist Robert Barro defines it as a decline in per-person economic output or consumption of more than 10%, and puts the odds of a depression at about 20%, reports Justin Lahart for The Wall Street Journal.
Traditionally, historians and economists say the line between recession and depression is crossed when unemployment rises above 10% and stays there for several years. Here are a few points to keep your perspective on what a Depression would look like and the likelihood of one:
- Unemployment after the first quarter was 8.5%. That’s not as bad as in the early 1980s – the last time the idea of a depression was being kicked around seriously, when it remained above 10% for 10 months. In the Great Depression, it reached 25%. We are not even near that area by any means.
- By the Barro definition, the odds of a depression are at 20%. Many economists think there are too many fiscal stimulus adjustments to cause another depression.
- Our government response is better than the 1930s; the Fed raised interest rates, the infamous Smoot-Hawley Tariff Act crushed trade and Treasury Secretary Andrew Mellon’s prescription for the economy was “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” Today’s policy errors exist, but they are not exacerbated.
- The structure of our economy today would mean a different depression. Fewer than 2% of Americans working today have agricultural jobs, compared with one in five in 1930. Three-quarters of today’s workers are in service-related jobs, which tend to be more stable than manufacturing, compared with fewer than half in 1930.
- A modern depression would not cause alarm for starvation by any means, as was the 1930’s. Food is around one-tenth of a family’s income today compared to one fourth back then.
The worst worry is even if the recession does not go deep enough to be a depression, the restructuring that it needs to go through means that even after the economy bottoms out, there could be a “lost” four or five years of sluggish growth, says Nobel laureate Paul Samuelson.
What is the same is that economists were just as blindsided this time around as they were back in the 1930s when the econmic upheaval occurred. Economists doubted the possibility of a financial crisis so severe it would upend the economy. Will we learn this time around?
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.