Real Time Economics: Defining Depression: Friday’s dismal November jobs report brings the old joke to mind: A recession is when your neighbor loses his job, a depression is when you lose yours. The truth is that there is no good rule of thumb for a depression, like the two quarters of consecutive GDP declines that many people use for a recession. And unlike recessions, which are semi-officially declared by the National Bureau of Economic Research’s business cycle dating committee, there’s no arbiter to say that an economy has fallen so hard it’s in a depression.
In the old days, what we now call recessions used to be called depressions. The word recession only came into common use after the Great Depression, in order to distinguish garden-variety downturns from that epic crash. Sort of like the World Meteorological Association retiring a devastating hurricane’s name. That said, with the economy in the midst of what may be its worst downturn in the postwar period, it is worth thinking about what it would take to dust off the “depression” moniker.
Richard Sylla, an economic historian at New York University, says that his rule of thumb for a depression would be double-digit unemployment rates lasting for more than a few months. The only times that occurred in the U.S. were during the Great Depression and the 1890s. The deep recession that ended in 1982 briefly saw unemployment rise above 10%. Berkeley economic historian Brad DeLong’s definition of a depression is in a similar vein: Unemployment hits 12%, or it stays above 10% for three years. Rutgers economic historian Michael Bordo says he would define a depression “as a sustained decline in output of 2 or more years of at least 10% per year. If you look at U.S. history we only really had one such event.” –Justin Lahart