What's the definition of a depression?

• Author: Adams, Tucker Hart
• Position: [the] ECONOMIST - Column

"What's the probability that the U.S. economy will never recover?" the reporter asked.

There aren't many questions about the likelihood of an economic event occurring that I can answer with a great deal of confidence, but that one was easy. "It's zero!" I replied. The U.S. economy has been through dozens of business cycles--33 according to the National Bureau of Economic Research, which has dated them back to 1857. In every instance, after a period of contraction, the economy recovered.

Although the reporter was my most pessimistic questioner, for the first time in a 30-plus-year career I'm getting questions about the possibility of a depression. They usually begin with, "What's the difference between a recession and a depression?"

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The short answer is that while this is an official definition of a recession ...

... a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales (NBER) ... ... there is no official definition of a depression. One man told me with great certainty that a recession became a depression when the economy contracted by 10 percent or more. If he were correct, the U.S. economy has gone through four depressions since World War II: two in the 1950s, one in the mid-1970s and a fourth in the early 1980s.

Another told me, "No, it's when the economy contracts by 25 percent." If that were right, then there hasn't been a depression since the Great Depression of 1929-33. It lasted 43 months, during which output declined by 27 percent. Economic-activity did not return to its previous peak until 1941. There have been two other economic contractions lasting more than three years--the 65-month decline in the 1870s and the 38-month decline in the 1880s.

When I was in graduate school, depression wasn't a topic of discussion. Of course, we read Milton Friedman's "A Monetary History of the United States," which lays much of the blame on the 30 percent contraction in the money supply. We learned about the Smoot-Hawley tariff, which many economists believe turned a cyclical contraction into the worst economic slump in our history.

We read John Maynard Keynes' "General Theory," which argued...