At What Point Is A Recession Really Just A Depression?

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.

Recessions and depressions 101 [Marketplace]
(Photo:Library of Congress)

Comments

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  1. EmperorOfCanada says:

    Americans better be taking this seriously.

  2. P41 says:

    One well known definition is that in a recession your neighbor is out of work, and in a depression you’re out of work.

  3. doctor_cos wants you to remain calm says:

    Are you serious?

  4. howie_in_az says:

    But I would say if you are earning some more money and you want to save a little bit…

    I’d argue that people should be saving more than “a little bit”, but that won’t help the economy.

  5. mwwilk says:

    @EmperorOfCanada: Random question for you, oh great Emperor of Canada.

    How is The Great White North faring economically? We all know what is going on here in the U.S., and I’ve even heard of similar economic issues in the U.K. to some degree (mortgages, etc), but I’ve always been curious about Canada. I’ve promised myself to look into it, which I will do, but since your eminence has graced this board, perhaps you can enlighten us. One would think that our two nations’ economies are pretty intertwined, but maybe not.

    About the only Canadian news we get down here is about Lord Conrad Black. Or perhaps that is because I’m in Chicago.

    I’m a dual citizen by virtue of my late father being a Canuck (and him having the foresight to get me a Canadian Citizenship when I was born). Even own some property somewhere in Ontario that Google Maps doesn’t even know about. Wondering when I should run for the border.

  6. zentec says:

    The time to take things seriously was when some kid with a community college business degree was on TV trying to talk you into “cashing out your equity” at an amazing 1.75% interest for the first five years.

    Like all grand parties, there’s always a group who wakes up with a massive hangover. The party is over, now it’s time to deal with the hangovers. And paying the bill.

    In all seriousness, it’s hard to be fiscally responsible when the leaders of your government are far from it.

  7. Beerad says:

    @P41: In the same vein, I was thinking that a depression is when I lose my job because of a recession. Zing! I’ll be here all week, folks. Don’t forget to tip your waitresses!

  8. Parting says:

    @mwwilk: Actually, everything is fine *cross fingers* Couple of banks invested in USA mortgage industry, but their losses are much smaller compared to US banks.

    Still, since there is so many commercial relations between Canada and US, economists are worrying that US will drag and slow down Canadian economy.

  9. Parting says:

    @zentec: 1.75% is less than yearly inflation. I would prefer to invest in stocks at this rate. Of some countries far away from US.

  10. Orv says:

    Ben Bernanke is calling it a “downcline.” If you can’t fix it, just rename it…

  11. Erwos says:

    Here’s the difference: depressions are typically characterized by large amounts of deflation. Recessions are typically flat or slightly inflationary.

  12. jefffromNY says:

    @mwwilk: Well I can answer that to some extent. The situation is very similar to the UK, they are enjoying a strong Canadian dollar, and housing prices are wild. It is worse than in California in a few major cities (I mean prices are so high). Basically Canada is where we were three years ago, expect one thing. Canada’s largest trade partner is America, since the American economy is rough, but not horrible, Canada’s economy isn’t taking a huge hit. Imagine the USA has a hand in most countries’ economies, so America can pass an economic hit off, and it could rattle other countries’ economies massively. Canada is not quite the same, it doesn’t impact other economies so much; however, should America drop imports from Canada big time, they are in trouble.

    Unemployment in Canada is perpetually slightly higher than America, and it is rising ever so slightly. But Canada tends to ride the same waves as America.

    About the article, it is pretty interesting, and I rarely agree with Reich, but I think he said something that regular Americans don’t – well at least the stupid ones don’t. You hear people say, “we are going through a recession, at least that’s my opinion.” However, a recession isn’t based on some opinion, it has concrete factors, you can opine that the factors will prove to have been met, but just because you and those around you are in a slump doesn’t mean a recession is here. Even if the media says the whole country is in a slump is meaningless. Reich is right, I, and many other economists believe that we have met several factors that mean that there is a recession. There is, however, no proof of this yet.

    Who knows? Maybe we will avoid a recession, the stocks have rebounded amazingly, it seems that more investors are believing that we will avoid anything too major, after all, housing prices have leveled off, and the government is finally seeming to respond in an important way. Aiding Bear Sterns is something that needed to be done if for no other reason than psychological will probably not end up even affecting the government in the end (JP Morgan should absorb most of it)

  13. jimconsumer says:

    IT’S NOT A FUCKING RECESSION!

    The definition of a recession is 6 consecutive months of negative growth. We’ve not had ONE month of negative growth. Has growth slowed? Yeah. Has it stalled completely? Nope. Our economy is STILL GROWING, hence, no recession, regardless of what the media hounds want you to believe.

    This is normal, people. What, did you think we could continue increasing our rate of economic growth forever? Don’t be silly.

  14. humphrmi says:

    Toward the end of the interview, I started questioning if this wasn’t an April Fools joke. To wit:

    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.

    Historically stocks that survive recession sooner or later (usually sooner) end up being priced above their pre-recession peak. The people who, during a roaring Bull market see a stock selling for $150 and wish they’d gotten in when it was $30 are the ones who say “Don’t buy stocks during a recession.”

    Even if there’s more downside coming, you can use cost averaging to lower your average price. If you buy stock in a fundamentally sound company now for 30 and it drops to 20, your average price (depending on shares of course) is 25. You’re not as smart as the guy who bought everything at 20, but you’re smarter than the guy who bought nothing at 30.

    So if we’ve already heard enough of “buy low, sell high” then why don’t we, collectively, understand the “buy low” side of the equation? Because it seems counter-intuitive to to buy stocks when they are down, especially when you don’t have as much money to risk. But if you don’t buy them when they’re down, when are you going to buy them? When everything’s rosy and stocks are hitting their peaks? Isn’t that “buying high”?

    You have to know your own tolerance for risk. But saying “probably don’t put them into stocks” seems a silly piece of advice to give right now.

  15. tripnman says:

    I’ve said it before, I’ll say it again…

    All this talk of recession has me in a depression. A Great Depression.

    Bah!

  16. Seth_Went_to_the_Bank says:

    We are experiencing “stagflation” which is when prices go up but the economy slows. This is very unusual – it hasn’t occurred since the 70s. It’s not a good sign.

    Picture the economy like one of the those old Victorian contraptions with a lot of dials, gears, and cranks and Ben Bernanke running around trying to keep the thing from breaking down.

    Right now on one of the dials the indicators are way out of whack and the whole machine is making a lot of strange grinding noises. And Mr. Bernanke is worried.

  17. humphrmi says:

    @Seth_Went_to_the_Bank: Careful.

    There’s no official definition of stagflation, but comparing to 1970’s, we’re still in much better shape than we were then.

    The percentage of income that Americans spend on gasoline today is a fraction of what it was in the 1970’s. Gasoline was the primary driver of inflation then, as it is today.

    The unemployment rates (i.e. the “stag” side of the word) in the ’70’s were huge by today’s standards. Think nearly double-digit unemployment; I think it peaked at around 9%. And they were fed by a lot of external forces that we don’t have today: millions of women and baby boomers entered the workforce, pushing up unemployment. Today, we’re sitting at nearly 4% unemployment and we have nearly the opposite, the boomers are getting ready to retire and soon we might have a problem keeping the productivity engine going without enough skilled workers.

    I’m not saying it’s not going to happen, but I don’t think we’re there yet and I don’t see it going that way soon. But it is something to keep an eye on.

  18. Zombilina says:

    @humphrmi: Well, you said it so I don’t have to. I’m dumping as much money as I can into my Roth IRA before the economy recovers.

  19. silverpie says:

    Back when I took high school economics, recession was indeed defined as a six-month period of negative GNP (would now be GDP) growth–although measured quarterly, so two straight readings. Depression: three in a row, plus 10% unemployment.

    On the other hand, what the Fed defines as a recession is simply the discretion of some entity called the NBER (National Bureau of Economic Research, or somesuch).

  20. amandakerik says:

    About the title / headline:
    Someone recently defined a depression as:
    When all three levels of society are in debt beyond their means to recover.
    The three parts being the gov’t, the corporation and the population in general.

  21. synergy says:

    Today I paid off my last credit card. YES. Now I just owe student loans to the gummint.