Depressions and Recessions

A reader writes:

If you want to explain the difference between a recession and a depression, or why it took seven years for the economy to regain previous highs after 2008, well, go ahead. I’m all ears.

Besides not understanding how long it took to re-attain the pre-recession peak in 2007 (it only took 3 years, not 7), the reader does not seem to understand “depression” does not have a fixed definition in the economics profession. There are two depressions in American economic history lingo, as far as I now, but I am willing to be corrected. Here are pictures of the two I am familiar with. First is the “Great Depression”.

Figure 1: Real GDP index (black), NBER defined recession dates peak-to-trough shaded gray, beginning and end of Great Depression at red dashed lines. Source: Gordon-Krenn (2010), NBER. 

Investopedia sets the Great Depression end in 1941, while Wikipedia’s text sets at 1940-41.

The other “great depression” is that associated with the Panic of 1893.

Figure 2: Real GDP in mn. 2012$ on log scale (black), NBER defined recession dates peak-to-trough shaded gray, beginning and end dates of Depression at red dashed lines. Source: MeasuringWorth, NBER.

Now, is there any comparison between the Great Recession and the Great Depression? I’ll let the non-visually-impaired reader decide.

Figure 3: Real GDP in logs normalized to 2007q4 peak (blue), normalized to 1929Q3 peak (brown). Source: BEA, Gordon-Krenn (2010), NBER, and author’s calculations. [Brown line dates — refer to trough at 1929Q3, also see scale on Figure 1]

So, at the trough associated with the Great Recession, output was 3.9% below peak (log terms). For the Great Depression, one trough was 38.6% below peak.

I’m going to go out on a limb, and assert that this particular reader has himself a highly idiosyncratic definition of “depression” (I have no idea what he means by “suppression”).

I am constantly amazed how willing some people are to pontificate with extremely little acquaintance with the relevant data.