How do depressions and recessions differ?
No-one can give an exact description of the difference between a depression and recession, not even the IMF (The International Monetary Fund which is a private international organization that oversees the global financial system). There are many who have opinions but there is a lack of a single definition which will satisfy everyone.
It is easier to define a recession. A recession is, among other things, at least two successive quarters with lower production. Economic quarters last three months, i.e. there are four such quarters a year. Some characteristics are high levels of unemployment, a fall in wages, high inflation and fewer retail sales.
So what’s a definition that most can agree on?
• A depression is a sustained, long downturn in one or more economies
Before the Great Depression we labeled all economic slumps as depressions. A decrease of an economy’s GDP of between 10 and 15% or more within one year. Some economists define depressions as periods that last about 36 months. This means depressions are equivalent – time wise, at least – to 6 recessions.
• Recessions are not always bad
Most things in life have highs and lows. Some economists believe the economy is one such thing and that recessions are to be expected. There are different types of recession, too: some recessions are mild; others are more severe. The UK had five recessions since the Second World War: 1974, 1975, 1980, 1981 and 1991. It is difficult to recognise a recession while it is happening – economists normally only announce a recession after analyzing data from at least two economic quarters.
• The Great Depression was two long periods
Most of us think the Great Depression of the 1930s was one long stretch of gloom. It was more than that. The depression lasted from 1929 until 1940 and had massive unemployment and falling stocks.
How do recessions turn into depressions?
Bank closures – The government decides to close banks and other financial institutions. This means that if we want to avoid a depression, the government should keep banks open. Bail-outs can be good for us, even though we finance them.
Taxes increase – Back in the 1930s the US government increased revenue act tax rate to 63%. This was a bold step because it had been 25% before the increase.
Buy local only – While buying local is a good idea it should not be implemented in isolation; the world’s economy depends on international trade.
Economists have a new definition
The new distinction between a depression and a recession is the cause.
Recessions normally happen because of a severe monetary policy; depressions happen after an asset and credit bubble, a decline in granting credit and a lowering of the general price level.
Does this apply to 2008-9? Or do we have to wait and see what happens next year?