Wednesday, December 17, 2008

Can We Call It a Depression yet?

As the resident economist (a title my qualifications are dubious for at best) on this and other blogs Ben and I have been a part of I thought I’d answer a question Ben has posed to me and is being bandied about by the pundit class. Are we in a depression now or just another recession?

My short answer is we won’t know until we’re on the other side of this. Truth be told there isn’t a commonly accepted definition of what a depression is. This stands in marked contrast to the commonly accepted definition of a recession used by economists. The “textbook” definition of a recession is at least two consecutive quarters of negative economic growth, which is to say from a strictly definitional standpoint we weren’t in a recession until after the Commerce Dept revamped numbers for the past few quarters.

This is in no way intended to imply people out there aren’t hurting, just that the until such time as we string together two quarters of negative growth (an oxymoron, but stay with me) we weren’t technically in a recession. We are now and evidently have been for a little while now, but does that mean we’re in a depression?

Again, my answer revolves around the definitions of economic phenomena and in that regard we won’t know. Back in 1929 everyone knew something bad was coming and in 1933, the statistical height of what is now known as The Great Depression, there wasn’t a household in America unaffected but the dismal economic conditions. My reading of history is to sparse to know if people referred to the period from 1929 to approximately 1935 as a depression at the time, but if they had it would have probably been towards the back end of the period when the full extent of the economic wreckage was coming into focus. Also, that was six years of economic contraction or stagnation with the rate of unemployed reaching over 30%, if memory serves. From where we sit it seems far to soon to think that after 12 months or even 18 months of an economic downturn we could justifiably declare our current economic state a depression. Our unemployment rate is on November 6th sat at 6.5% and analysts at that time expected it to increase to 8% by the middle of next year. As awful as that is, it not even in the double digits yet. We could get there, but that would seem to be a long ways off. Also so far during our current recession the economic contraction rate has not exceed 1%,which puts us in comparatively better shape then those that lived through The Great Depression.

The bottom line is that we could find ourselves in a depression in a couple years, but we’re not there yet and we’ve for a long way to fall before we get there. I don’t think we’ll look back at this time and ever consider it a depression. I do think there will be a revolution in economic and business cycle thought because of our current experience and I’ll explain why.

The U.S. economy by and large no longer “makes” things. The percentage of GDP that is comprised of manufactures has continued to decline over the past decade. We are a service economy propelled forward by financial vehicles and the multiplier effect those profits send into the marketplace. Now this is unsupported by any one source and more my summation of the economy as I perceive it today, so slam me for being wrong if you can prove I am.

Because we don’t make things anymore the old Keynesian remedies will have a limited affect. There are droves of disaffected workers out there, but how many of them are blue collar? We should absolutely invest in infrastructure improvements, but how many people will there be to fill these jobs? And perhaps the most perplexing problem is what to do with all those laid off white collar workers? There are 30,000 people that used to work for Lehman Brothers and I would venture to say few would be inclined, or even qualified to lay brick or pave a road. This creates the real challenge for President-elect Obama. You can’t send them all back to school, and if you did what profession would they learn? No doubt a number of the folks who used to work in the financial sector are far better positioned to deal with a period of unemployment then many blue collar workers, but where will they find work?

I haven’t heard any good answers to this problem and I don’t have any to share.

So what does it all mean? Quite honestly the nature of our current recession is something wholly new to our economic experience and some time back the complexity of the finance involved transcended my ability to understand. That said there are two things I am fairly certain of:
1) It’s going to get worse before it gets better
2) It will get better

Obviously not comforting thoughts, but we are in uncharted waters here. The bottom could be a long way off or could be today. Time will tell if we are living in a severe recession or in a depression. What’s clear in the present is that we can’t call this a depression yet. Someday in a distant future (or near future) and call me an idiot, but for my thoughts on this day I’m unprepared to accept we are in a depression.

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