Depression or Recession? Determining Whether

Depression or Recession?

Determining whether the U.S. economic crises of 2008 is a "depression" or a "recession" depends largely on whether one applies traditional one-dimensional criteria (such as the absolute measure of decline in GDP) or multi-dimensional criteria (such as: 1. The complex interrelationship between consumption and leisure and 2. The underlying financial mechanisms that trigger the event). Generally, to the extent one relies on traditional one-dimensional criteria, the economic crisis of 2008 was a recession; to the extent one relies on more complex criteria, it more closely resembles a depression, particularly in the manner that it occurred.

One of the most important traditional "textbook" criteria for identifying an economic depression is change in GDP. By that one-dimensional criterion, any economic downturn that results in a reduction in the national GDP of 10% or more is a "depression" whereas a lesser reduction in GDP is a "recession." Another traditional one-dimensional criterion of economic depressions is a high rate of unemployment. By that measure, the Great Depression was a bona fide depression because unemployment reached nearly 25% of the U.S. workforce. Meanwhile, the 10% unemployment rate of the 2008 economic crisis suggests that it was merely an economic recession (Judis, 2010).

However, by a more complex analysis of other factors, the economic crisis of 2008 was more similar to a depression, primarily by virtue of the underlying precipitating factors that caused it (Judis, 2010; Ohanian, 2010). First, economic recessions reflect ordinary (downward) fluctuations in business cycles. Conversely, economic depressions are precipitated by specific financial crises such as worldwide gold outflow-related global inflation in 1893, the stock market crash of 1929, and the sub-prime mortgage crisis of 2007 and 2008. Second, economic depressions are precipitated by overcapacity in leading industries such as the post-Reconstruction-era slowdown in railway construction and private investment leading up to 1893, the tapering off of automobile and street car production immediately prior to 1929, and the bursting of the "dot com" bubble and slowdown in construction, housing sales, and auto sales shortly before 2007. Third, economic depressions spread from one nation to others whereas economic recessions remain substantially isolated where they first occur and they are eased partially by the strength of national economies elsewhere. Finally, contemporary analyses of economic downturns suggest that distortions to industrial labor markets that keep wages above market-clearing levels are more significant than even bank failures (Ohanian, 2010).

Recommendations and Conclusion