Marketplace Money asks former Labor secretary and Berkeley professor Robert Reich to explain the difference between a recession and a depression–and to tell us what to do about the ugly consumer spending paradox we find ourselves in.
Vigeland: What are the traditional definitions of a recession first and also a depression? How are they different?
Reich: Well, a recession is now officially defined as two quarters — that is six months — where the economy suffers negative economic growth, where the economy actually shrinks. Now, a depression… there is no official definition of a depression. I think one reason is that economists and other policy makers just don’t like to use the word — it’s such a bummer — but in common parlance it means a very, very severe recession: high unemployment, businesses pulling way, way back from investing and all of the other things that happen during a recession, just more so.
Vigeland: Do those definitions still hold in what we call the new economy? I mean, you mentioned these two consecutive quarters of negative growth. We have not seen that yet, but so many people are saying we are in a recession.
Reich: Yes, I think people are assuming we’re in this recession because all of the indicators are trending in that direction: unemployment seems to be moving upward and then businesses are pulling back. You know, if you’re somebody like me who looks at the economic data that come in over the transom, it’s just bad news.
Vigeland: It certainly feels like that, but how deep and long would the current recession, assuming we’re in one, have to be to turn into a depression?
Reich: Well, again, because there’s no fixed definition of a depression, nobody really knows. I would say that unemployment would probably have to reach 8 or 9 percent — we haven’t seen that kind of unemployment in a long time. Businesses would have to contract considerably in terms of their economic activity before people would start using the “D” word. You know, here’s the problem Tess: some of this is psychological. Undoubtedly, the tendency people have to go to the stores and buy things has a lot to do with how much money they have in their pocketbooks and how much they can get access to credit, how easily they can, but it also has to do with their expectations of the future. When consumer expectations drop to the cellar as they are now dropping, the economy has a tendency to follow, so there’s a kind of a downward cycle that sets in.
Reich also gives some advice for consumers who are being told to spend themselves our of a recession:
Reich: Well, let’s put it this way: it’s new to the extent that the extend to which Americans are dependant on credit is new. I mean, Americans are deep in debt; we’ve never had this much indebetedness and as a result, when they pull back from being in debt, that is new simply because we’ve never been this deeply in debt. Here we get into a paradox, because what’s right and proper and appropriate for an individual — spending less money — if everybody start’s being very fiscally responsible together, then we are in a very severe recession.
Vigeland: What’s the best thing then that consumers — our listeners — can do to avoid really panicking over the current financial situation when they hear that things really are quite bad.
Reich: Well, the first thing is not to panic. Don’t take money out of your savings accounts, our of your 401(k)s — that will just make the situation worse. But I would say if you are earning some more money and you want to save a little bit, probably don’t put them into stocks right now. I’d also say that it does make sense for the individual consumer to get out of deep debt, to just be a little more prudent.
Shhh! Don’t listen to him! Keep buying widgets!
You can listen to the full interview here.