Depression (Economics)

¹²Depression (Economics)

By From Wikipedia, The Free Encyclopedia | 30 June 2010

In economics, a depression is a sustained, 'long-term' downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by economists as part of a normal business cycle. Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit [[eg, as the result of a banking or similar financial crisis: normxxx]], shrinking output and investment, numerous bankruptcies [[including sovereign debt defaults: normxxx]], reduced amounts of trade and commerce [[especially international, see Baltic Exchange Dry Index: normxxx]], as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation, financial crises and an unusually large number of bank and other financial institution failures are also common elements of a depression.

Definition

There is no widely agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions.[1] Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).[2] Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years.[3][4]

Terminology

Use of the term "depression" to refer to an economic downturn dates to the 19th century, when it was used by various American and British politicians and economists. The term has connotations both of "a depressed (below usual) level of economic output", and psychological depression (unhappiness). While in the technical sense it refers to a deep and/or prolonged reduction in economic activity, it is popularly used to suggest a crisis of confidence; compare malaise. Alternative terms for extended periods of poor economic performance include "lost decade" and "L-shaped recession".

Today the term "depression" is most often associated with the Great Depression of the 1930s, but the term had been used long before then. Indeed, the first major American economic crisis, the Panic of 1819, was described by then-president James Monroe as "a depression",[5] and the economic crisis immediately preceding the Great Depression, the Depression of 1920–21, had been referred to as a "depression" by president Calvin Coolidge. However, [[in the 19th and early 20th centuries: normxxx]], financial crises were traditionally referred to as "panics", eg, the 'major Panic' of 1907, and the 'minor Panic' of 1910–1911, though the 1929 crisis was most commonly referred to as "The Crash", and the term "panic" has since fallen out of use. At the time of the 1930's Great Depression, the term "The Great Depression" had already been used to refer to the period 1873–96 (in the United Kingdom) or, more narrowly, 1873–79 (in the United States), which has since been retroactively renamed the "Long Depression".

Use of the phrase "The Great Depression" for the 1930s crisis is most frequently attributed to British economist Lionel Robbins, whose 1934 book The Great Depression is credited with 'formalizing' the phrase.[5] However, US president Herbert Hoover is widely credited with having 'popularized' the term/phrase—[5][6] informally referring to the downturn as a depression, with such uses as "Economic depression cannot be cured by legislative action or executive pronouncement", (December 1930, Message to Congress) and "I need not recount to you that the world is passing through a great depression", (1931).

Occurrence

Due to the lack of an agreed definition, and the strong negative associations, the characterization of any recent period as a "depression" is contentious. The term was frequently used for regional crises from the early 19th century until the 1930s, and for the more widespread crises of the 1870s and 1930s, but economic crises since 1945 have generally been referred to as "recessions", with the 1970s global crisis referred to as "stagflation", but not a depression. At this time, the only eras of the past two centuries commonly referred to as "depressions" are the 1870s and 1930s.[7]

To some degree this is simply a stylistic change, similar to the decline in the use of "panic" to refer to financial crises, but it does also reflect that the economic cycle— both in the United States and in most OECD countries— though not in all— has generally been more moderate since 1945. There have been many periods of prolonged economic underperformance in countries/regions since 1945, detailed below, but terming these "depressions" is controversial. The most recent recession, ie, that of December, 2007 onwards, which has been the most significant global crisis since the Great Depression, has at times been termed a depression,[7] but this terminology is not widely used, with the episode instead being referred to by other terms, such as the punning "Great Recession".