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Western Mass. professors say economy is flirting with depression
by The Republican Newsroom
Saturday February 21, 2009, 4:00 PM
By JIM KINNEY
[email protected]
Economists don't have a good definition for a depression compared with a recession, but they know it when they see it.
And, they think they just may be seeing it.
It's a question for people who do macroeconomics, a science that didn't exist during the last honest-to-goodness, riding-the-rails-looking-for-work Great Depression.
"It's a great time to be an economist. Things are happening all the time," said Gerald C. Friedman, professor of economics at the University of Massachusetts in Amherst. "We get to see all our theories tested out."
One of the most common definitions for a depression is at least a 10-point drop in the nation's gross domestic product. The drop would be measured peak-to-trough, not over a set period of time.
"That's pretty much what we're looking at now," Friedman said. The gross domestic product, or the total value of goods and services produced by the nation excluding net income earned abroad fell 3.8 percent in the last quarter of 2008 and by 0.5 percent in the third quarter.
"We've got a ways to go," Friedman said. "On the other hand, we're getting there."
In the Great Depression, the gross domestic product fell by a third from 1929 to 1933. Unemployment peaked at 25 percent.
A second wave of the Great Depression led to an 18.2 percent drop in gross domestic product in 1937 and 1938, according to Karl T. Petrick, an assistant professor of economics at Western New England College.
"People forget that it got better and then it got worse," Petrick said. "Britain and Germany recovered much more quickly than the United States. Germany started to re-arm and Britain had to follow."
He said declining rates of consumer borrowing are now at 3 percent of gross domestic product. In 2007, that borrowing rate was 8 percent of the gross domestic product. The normal borrowing rate is 2 percent of gross domestic product.
"It's falling like a rock," Friedman said.
Factory utilization is now at 70 percent of capacity, he said.
"That's falling minute-by-minute," he said.
Those two factors alone combined with continuing layoffs and cutbacks by state and local governments might add up to a 15 percent drop in gross domestic product when new numbers come out after the first quarter of this year, Friedman said by way of a prediction.
Petrick said gross domestic product numbers also count the buildup of inventories as a positive. In normal economic times, such buildup of goods in warehouses is a sign of a recovering economy because companies are getting ready to sell goods in the recovery.
"Now it's because demand has dropped so fast," Petrick said. "If that isn't a depression, its very close."
But Friedman said there is no set definition of a depression versus a recession. The technical definition of a recession is two consecutive quarters of declining gross domestic products.
"Macroeconomics, the field that studies these things and dates these things, came after the Great Depression," he said. " It emerged from the Depression."
The National Bureau of Economic Research defines recessions, said Carol E. Heim, a professor of economics at UMass Amherst. The Business Cycle Dating Committee is in charge of figuring out when the recessions begin and end, usually making the determination months after the fact.
There is nobody in charge of calling depressions, though.
"As far as I know there isn't one," she said. "It doesn't mean it doesn't exist."
Heim said the British magazine The Economist took the 10-point-drop standard and applied it to historic data in search of depressions. It turned out only one developed economy has had one since World War II: Finland from 1990 to 1993.
"It was the collapse of the Soviet Union," she said. "That was their greatest trading partner."
And, if someone tells you they lived through America's longest depression, they really are betraying their age. It was from 1873 to 1879.