You Say Depression, I Say Recession
Are we talking about the same thing?
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After the House rejected a $700 billion bailout of the financial sector on Monday, Lyle Gramley, a former Federal Reserve governor, warned that "we're in a recession now, and the numbers show the recession deepening." According to a USA Today/Gallup poll conducted over the weekend, one-third of adults believe the economy is in a depression. What's the difference between a recession and a depression?
Severity. One widespread definition of a recession—the one used by newspapers—is a decline in the gross domestic product for two or more consecutive quarters. The term depression, by contrast, commonly refers to a grave, prolonged recession during which the GDP declines by more than 10 percentage points.
Most economists, however, quibble with these lay characterizations since they don't take into account the unemployment rate or consumer confidence. The National Bureau of Economic Research, for example, defines the term recession as a "significant decline" distributed across the economy lasting more than a few months, usually visible in the numbers for GDP, employment, industrial production, and wholesale-retail sales. Understood as a natural part of the business cycle, a recession is the period between when activity has reached its peak and when it reaches its low point or "trough." There is no corresponding NBER definition of a depression, nor can economists agree on an official dividing line between a depression and a bad recession.
The last time the U.S. economy experienced a depression as measured by the 10-point standard was in the 1930s. Although the Great Depression is often studied as one long event, it actually comprised two separate downturns: The GDP declined by more than 30 percent from 1929-33, then by about 18 percent from 1937-38. At one point, a quarter of the U.S. population was unemployed. The Finnish economy tumbled into depression more recently. After the collapse of the Soviet Union, Finland lost a significant portion of its export markets. Its GDP slumped by about 11 points in the early 1990s, and unemployment reached the 20 percent mark.
Recessions are actually rather common. According to the NBER, the U.S. economy experienced an eight-month recession from March 2001 to November 2001 and another one from July 1990 until March 1991. During the early 1980s, the economy slumped twice—in the first half of 1980 and from July 1981 until November 1982.
During the 1980 presidential election season, Ronald Reagan described the economic downturn as a "depression," and Jimmy Carter attacked him for using the term inaccurately. Reagan countered with this quip: "Let it show on the record that when the American people cried out for economic help, Jimmy Carter took refuge behind a dictionary. Well, if it's a definition he wants, I'll give him one. A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his."
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Juliet Lapidos is a former Slate associate editor.
Photograph of a bank run from 1929 by AFP/Getty Images.