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How Bad Could It Get?Will the recession be more like the 1990-'91 downturn or the Great Depression?

By James LedbetterPosted Friday, May 2, 2008, at 5:06 PM ET

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And remember: If Feldstein is right, then we've already been through six months of shrinkage, so only another 10 or so to go. Not a reason to cheer—but also not a reason to panic.

Joblessness. The age-old joke says that it's a recession when your neighbor loses her job and a depression when you lose yours. The joke contains a kernel of economic truth: The Great Depression involved massive job losses that affected nearly every American family. At one point during that 43-month ordeal between 1929 and 1933, one in every four working Americans was unemployed. Every significant industry cut jobs, and entire towns and regions—at least in economic terms—were wiped off the map.

It's never been that bad since. In the 1981-'82 downturn, the unemployment rate hit nearly 11 percent, but the postwar norm has been single digits. (The April rate is 5 percent, down from 5.1 percent in March.) True, unemployment is generally considered a "lagging indicator," meaning that if we're in a recession now, we may not yet have seen the worst of job losses. Moreover, critics say that the official definition of unemployed would be larger if it included people who work part-time but can't find full-time work, the substantial U.S. prison population, and so on.

But no one would dispute that the American economy is more dynamic and resilient than it was in the '30s. The overwhelming majority of workers in those days toiled in either manufacturing or agriculture, sectors that are especially vulnerable to bust cycles. The employment market has diversified, workers have better skills, and global trade is much more important. So, if this recession leads to increases in unemployment—as it almost certainly will—not all job sectors will be uniformly hit. (Even in the severe '81-'82 recession, only 72 percent of U.S. industries experienced declining employment, compared with 100 percent during the Depression.) Wages may well flatten or shrink—as they've been doing for years—but it's difficult to find a credible scenario in which U.S. unemployment is going to hit 10 percent in the next 18 months.

Depth. The recession between 1973 and 1975 was punishing. Then as now, rising fuel costs led to inflation (more than 12 percent in 1974). An unprecedented wage and price freeze imposed by the Nixon administration did not stem the problem. Gasoline was rationed, and unemployment rose as high as 9 percent.

Yet for all that, the actual drop in gross national product, according to research by late economic historian Geoffrey Moore, was just under 5 percent. By that measure, '73-'75 was the worst recession since the Depression. The inflation-adjusted gross domestic product (as it is now called) has shrunk only in two brief periods since—in the early '80s and the early '90s, in both cases by less than 3 percent.

So, let's say this recession gets as bad as the one in '73-'75. The 2007 gross domestic product in current dollars is more than $13.8 trillion. A 5 percent hit this year would take the economy to $13.1 trillion, or a little less than what it was in 2005. Based on growth patterns that have been quite steady since 1939, we'd be back at $13.8 trillion by 2009. Undesirable, but not catastrophic.