What's the difference between a depression and a recession?
October 8, 2012 12:21 PM Subscribe
Depression vs. recession
Back in the 1930s it was The Great Depression; we're (hopefully) currently coming out of The Great Recession. Okay, both apparently include higher unemployment, bank and business failures and home foreclosures.... I think.
So, I'm an economic dummy: please explain, in basic terms!, what the difference is between a depression and a recession!
Back in the 1930s it was The Great Depression; we're (hopefully) currently coming out of The Great Recession. Okay, both apparently include higher unemployment, bank and business failures and home foreclosures.... I think.
So, I'm an economic dummy: please explain, in basic terms!, what the difference is between a depression and a recession!
Best answer: Depression and Recession are very specifically defined terms in this context. You can see from that recession link that a recession in the US is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." -- Basically this means GDP and several other things have to be actually going down for several months in a row. A depression, on the other hand, is either a decline in real GDP exceeding 10%, or a recession lasting 2 or more years.
In this technical definition, the recession was pretty short (about a year), and ended 2 years ago -- see this Chart -- as soon as the line started going up again at the beginning of 2010, the recession was over.
posted by brainmouse at 12:27 PM on October 8, 2012 [1 favorite]
In this technical definition, the recession was pretty short (about a year), and ended 2 years ago -- see this Chart -- as soon as the line started going up again at the beginning of 2010, the recession was over.
posted by brainmouse at 12:27 PM on October 8, 2012 [1 favorite]
Actually the definitions are kind of fuzzy, in that not everyone agrees. See the definitions section of the wikipedia page linked by brainmouse. In the US the National Bureau of Economic Research is pretty much the "official" source for defining these, and they don't define "depressions." See their FAQ:
Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?posted by Wretch729 at 12:31 PM on October 8, 2012
A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP. In the recession beginning in December 2007 and ending in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009. The committee places real Gross Domestic Income on an equal footing with real GDP; real GDI declined for six consecutive quarters in the recent recession.
One thing to keep in mind is that while recession is pretty specifically defined, depression is not. Or, more accurately, there's more than one way to define it. The wikipedia entry for Depression goes into some of this; the short version is everyone agrees that it's a name for a very bad, very long recession. How bad, and how long, and when it ends... there's no serious consensus there. Part of this, I suspect, is that there have been relatively few periods that are defined by general consensus as "depression," so we can skate by on vague "it was really bad," whereas periods of less-bad-but-still-bad economic conditions happen pretty often, so there's more pressure to figure out precise definitions of their start and end points.
posted by Tomorrowful at 12:35 PM on October 8, 2012
posted by Tomorrowful at 12:35 PM on October 8, 2012
Best answer: If I am remembering my history properly, I think it's basically a matter of branding. Before the Great Depression, this sort of phenomenon was usually called a recession, or sometimes a panic (because yeah, that sounds comforting). When the stock market crashed in 1929, politicians and economists wanted to avoid scaring the public even more, and so they decided to use a new term that didn't sound as bad to 1929 ears: so they called it a depression. Of course, now that the Great Depression is imprinted on American consciousness, we think that a Depression sounds a lot worse than a Recession, which means that our current politicians, who are also trying to be reassuring, choose to use the word Recession instead when they are talking about the whole mess.
posted by colfax at 12:39 PM on October 8, 2012 [1 favorite]
posted by colfax at 12:39 PM on October 8, 2012 [1 favorite]
Or, as a wag once put it:
A recession occurs when you are out of work; a depression occurs when I am out of work.
But yes, spin for political advantage has determined the usage over the years.
posted by cool breeze at 2:31 PM on October 8, 2012
A recession occurs when you are out of work; a depression occurs when I am out of work.
But yes, spin for political advantage has determined the usage over the years.
posted by cool breeze at 2:31 PM on October 8, 2012
Response by poster: So generally speaking, a depression is merely an extreme (in lenght or in depth) version of a recession.
Colfax brings up an extra point: a panic..... that would be equivilent to a depression, as in both are extensions of the same thing, a recession?
posted by easily confused at 4:50 PM on October 8, 2012
Colfax brings up an extra point: a panic..... that would be equivilent to a depression, as in both are extensions of the same thing, a recession?
posted by easily confused at 4:50 PM on October 8, 2012
I'll try to limit myself to lay terms in differentiating these two, but making the distinction clear is important, so I apologize if this gets too technical.
While the definitions are loose, the reality is that a recession is symptomatic of undulations in the traditional 5-7 year business cycle while depressions are symptomatic of generational (or multi-generational) debt cycles. E.g. in the late 90s speculative excess in the technology sector lead to an overheating of market valuations and economic distortions that popped in spectacular fashion in 2001 (remember drkoop.com?). This lead to a mild recession which was remedied by the Federal Reserve lowering interest rates, effectively boosting the economy through monetary policy. Easy enough.
A depression is a situation where aggregate debt has accumulated in the economy to such an extent that a crash renders it damaged to such an extent that monetary policy is ineffective in ressucitating economic growth, especially due to the damage said debt accumulation has to the financial system of the economy. This is because there is a zero bound that the traditional cure found through easing can reach (i.e. a "zero interest rate policy") and the only true tonic to heal the economy is a combination of austerity to bring fiscal imbalances in order, inflation through money printing to ease the debt burden, growth (very difficult to achieve) and debt default. We currently have passed the threshold of traditional max-easing and moved into the uncharted territories of quantitative easing.
As such, we are currently at the precipice of door #2. It is this author's informed opinion tha t if it weren't for the extraordinary coordinated actions by global central banks (both easing and fiscal stimulus), we'd have easily walked right into another depression. There are distinct paralells between the market crash of 1929 and the crash of 2008, except our government was far more adept at handling said crash than were the ill-iinformed administrations at the time. The distinctions are voluminous and require another avenue for discussion.
Interestingly enough, if you study the history of recessions, depressions (both kinds which lead to deflation and hyperinflation) and sovereign debt defaults, the general process is almost always the same, regardless of decade or century. This time is nothing new, except for the increasing layers of complexity and interconnectedness that is prescriptive of our 21st century global economy. This, unfortunately, is a huge (and somewhat uncharted) risk.
I don't want to cause a political shitstorm around my comments about CB intervention, but its a simple fact for anyone who has studied and understands how to dissect debt deleveraging cycles over the last 200 years of modern history.
posted by Hurst at 5:37 PM on October 8, 2012
While the definitions are loose, the reality is that a recession is symptomatic of undulations in the traditional 5-7 year business cycle while depressions are symptomatic of generational (or multi-generational) debt cycles. E.g. in the late 90s speculative excess in the technology sector lead to an overheating of market valuations and economic distortions that popped in spectacular fashion in 2001 (remember drkoop.com?). This lead to a mild recession which was remedied by the Federal Reserve lowering interest rates, effectively boosting the economy through monetary policy. Easy enough.
A depression is a situation where aggregate debt has accumulated in the economy to such an extent that a crash renders it damaged to such an extent that monetary policy is ineffective in ressucitating economic growth, especially due to the damage said debt accumulation has to the financial system of the economy. This is because there is a zero bound that the traditional cure found through easing can reach (i.e. a "zero interest rate policy") and the only true tonic to heal the economy is a combination of austerity to bring fiscal imbalances in order, inflation through money printing to ease the debt burden, growth (very difficult to achieve) and debt default. We currently have passed the threshold of traditional max-easing and moved into the uncharted territories of quantitative easing.
As such, we are currently at the precipice of door #2. It is this author's informed opinion tha t if it weren't for the extraordinary coordinated actions by global central banks (both easing and fiscal stimulus), we'd have easily walked right into another depression. There are distinct paralells between the market crash of 1929 and the crash of 2008, except our government was far more adept at handling said crash than were the ill-iinformed administrations at the time. The distinctions are voluminous and require another avenue for discussion.
Interestingly enough, if you study the history of recessions, depressions (both kinds which lead to deflation and hyperinflation) and sovereign debt defaults, the general process is almost always the same, regardless of decade or century. This time is nothing new, except for the increasing layers of complexity and interconnectedness that is prescriptive of our 21st century global economy. This, unfortunately, is a huge (and somewhat uncharted) risk.
I don't want to cause a political shitstorm around my comments about CB intervention, but its a simple fact for anyone who has studied and understands how to dissect debt deleveraging cycles over the last 200 years of modern history.
posted by Hurst at 5:37 PM on October 8, 2012
colfax, best not speculate on these matters. As near as I can tell, the term "great depression" (usually as "a" or "in a" rather than "the") first referred to the "Discontent and Distress" that occurred in Great Britain under George III. It continues as a generic term, more or less, through several panics and slumps (the more popular terms), until the worldwide panic of 1873, which led to a prolonged slump known for the next decades as "the" Great Depression. After the term became indelibly associated with the slump of the 1930s, though, the 1873 slump became known primarily as the Long Depression. Both terms were used to describe the aftermath of the Panic of 1893, as well. Mostly there wasn't any sort of common "branding" of these periods as we do today, though, and much of what we know as modern economics has its roots in the study of the 1930s Great Depression, anyway, so terminology became formalized out of necessity.
Google Books (an uncertain rubric) suggests that the term "Great Depression" did not take hold until 1934, when it was in the title of a pair of books. Until then it was known e.g. as "the depression of 1930".
Recession, as a term, grew up with modern economics and was not widely used. I don't believe there was much concern about the terms until Reagan formalized their difference in the famous phrase paraphrased above, but also, most of thre postwar recessions were brief, spiky affairs that did not compare well to the extended employment slump of the 1980s. That was the first time, it seems to me, that the politics, as such, of using one term over the other had sway.
posted by dhartung at 1:56 AM on October 9, 2012
Google Books (an uncertain rubric) suggests that the term "Great Depression" did not take hold until 1934, when it was in the title of a pair of books. Until then it was known e.g. as "the depression of 1930".
Recession, as a term, grew up with modern economics and was not widely used. I don't believe there was much concern about the terms until Reagan formalized their difference in the famous phrase paraphrased above, but also, most of thre postwar recessions were brief, spiky affairs that did not compare well to the extended employment slump of the 1980s. That was the first time, it seems to me, that the politics, as such, of using one term over the other had sway.
posted by dhartung at 1:56 AM on October 9, 2012
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posted by Idle Curiosity at 12:25 PM on October 8, 2012