Is This A Depression? Perhaps, But It Depends

While predicting recessions may be difficult, detecting when they've arrived is a bit easier.

The classic measuring stick is that a recession occurs when gross domestic product declines for two consecutive quarters. A committee of the National Bureau of Economic Research has a slightly different definition -- saying a recession is a broad drop in economic activity that lasts more than a few months.

In December, the NBER's Business Cycle Dating Committee declared that the current economic decline began a year earlier.

But there's no simple, universally-agreed-upon formula to judge whether we're in a depression right now. That's mostly because nobody (except for some free-market economists) thought the Great Depression would ever repeat itself, with the conventional wisdom being that world government and central banks had learned their lessons from the 1930s.

There were even articles like one in Foreign Affairs magazine, written by Berkeley professor Steven Weber and titled "The End of the Business Cycle?" Weber argued that "in advanced industrial economies the waves of the business cycle may be becoming more like ripples."

We know how accurate that prediction was. Those "ripples" became an economic tidal wave that's caused U.S. stock indexes to fall by more than 50 percent from their peak and home prices in some areas (including, we might note, near Berkeley) to fall by more than 50 percent.

Those dramatic price declines are hallmarks of a depression. So are bank failures, a credit crunch, increasing unemployment and government responses in the form of bailouts and massive new spending programs. The ShadowStats.com Web site calculates that if unemployment were calculated using the government's older methodology, unemployment would be around 19 percent.

An Associated Press article earlier this month noted that: "With each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way... Today's recession is already longer than all but two of the downturns since World War II. But for now, public officials are being extremely cautious about the D-word."

In a recent op-ed article, Harvard economist Robert Barro put the odds of a depression at roughly 20 percent.

"There is ample reason to worry about slipping into a depression," Barro wrote, estimating that a stock market crash leads to a 28 percent chance of an economic decline of at least 10 percent, and a 9 percent chance of a major decline of at least 25 percent.

Economist Nouriel Roubini, chairman of New York–based research firm RGE Monitor who warned about the housing bubble in 2005, told Time magazine in its March 3 issue that there's a 33 percent chance of a U.S. "near-depression."

Not everyone has been so wary of using the D-word.

International Monetary Fund chief Dominique Strauss-Kahn said last month, according to the Wall Street Journal that the United States, western Europe and Japan are "already in depression" and the "worst cannot be ruled out."

General Electric CEO Jeff Immelt has made depression comparisons, and countries like Ukraine were pretty clearly in depression mode even last year. Berkshire Hathaway last month reported its worst loss ever, and the World Bank said this week that the global economic pain was reaching levels not seen since the Great Depression.

An excerpt published Wednesday from Richard Posner's forthcoming book puts him squarely in the depression camp.

Posner writes: "The word itself is taboo in respectable circles, reflecting a kind of magical thinking: if we don’t call the economic crisis a 'depression,' it can't be one. But no one who has lived through the modest downturns in the American economy of recent decades could think them comparable to the present situation... It is the gravity of the economic downturn, the radicalism of the government's responses, and the pervading sense of crisis that mark what the economy is going through as a depression."

At some point, the answer to a recession vs. depression question becomes a bit academic. If you've lost your house and job and have moved your family into a motel room or a tent city near Sacramento, fine distinctions probably don't matter much.

But to investors and Washington officials, the difference is important. The Dow Jones industrial average is mimicking the rate of decline during the Great Depression, which eventually led to a 90 percent fall; if you think we're in for a repeat, you shouldn't merely exit the market, you should actively bet against it and perhaps buy gold and silver coins (and stash them in a home safe).

On the other hand, if the outlook is sunnier, as Fed Chairman Ben Bernanke, at left, believes, the U.S. economy will recover in 2010.

Here's one last possible measurement: the 1981-82 and 1973-75 recessions each lasted 16 months, meaning that if the current downturn lasts beyond April 2009, it will be the longest since the Great Depression. If the current malaise lasts through the summer or fall, as seems likely, the word "depression" will no longer be taboo.