What is the difference between a recession and a depression?

There is an old joke among economists that states: a recession is when your neighbor loses his job, a depression is when you lose your job. The difference between the two terms is not very well understood for one simple reason: there is no universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. The popular rule of thumb for a recession is two consecutive quarters of falling GDP. However, America's National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. So how severe does this current slump have to get before it warrants the “D” word?

A search on the Internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years. America's Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. * Output also fell by 13% during 1937 and 1938. The Great Depression was America's deepest economic slump, but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months. Japan's “lost decade” in the 1990s was not a depression, according to these criteria, because the largest peak-to-trough decline in real GDP was only 3.4%, over the two years to March 1999. Since the Second World War, only one developed economy has suffered a drop in GDP of more than 10%: Finland's contracted by 11% during the three years to 1993, mainly thanks to the collapse of the Soviet Union, then its biggest trading partner.

Emerging economies, however, have been much more depression-prone. Among the 25 emerging economies there have been no fewer than 13 instances in the past 30 years of a decline in real GDP of more than 10%. Argentina and Poland were afflicted twice. Indonesia, Malaysia and Thailand all suffered double-digit drops in output during the Asian crisis of 1997-98, and Russia's GDP shrank by a shocking 45% between 1990 and 1998.

Before the 1930s all economic downturns were commonly called depressions. The term “recession” was coined later to avoid stirring up nasty memories. Even before the Great Depression, downturns were typically much deeper and longer than they are today. One reason why recessions have become milder is higher government spending**. In recessions governments, unlike firms, do not slash spending and jobs, so they help to stabilize the economy; and income taxes automatically fall and unemployment benefits rise, helping to support incomes. Another reason is that in the late 19th and early 20th centuries, when countries were on the gold standard***, the money supply usually shrank during recessions, exacerbating the downturn. Waves of bank failures also often made things worse.

But a recent analysis concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. The economic slumps during the Asian crisis were not really depression because inflation increased sharply. On the other hand, Japan's experience in the late 1990s, when nominal GDP shrank for several years, may qualify.

Another important implication of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates**, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy.

Yes, we have no bananas

 

Where does that leave us today? Most economists dismiss the likelihood of a 1930s-style depression or a repeat of Japan in the 1990s, because policymakers are unlikely to repeat the mistakes of the past. In the Great Depression, the Fed let hundreds of banks fail and the money supply shrink by one-third, while the government tried to balance its budget by cutting spending and raising taxes. America's monetary and fiscal easing this time has been more aggressive than Japan's in the 1990s. Undoubtedly, policymakers will not make the same mistakes as in the 1930s, but they may make new ones.

Afterword: In 1978 Alfred Kahn, one of Jimmy Carter's economic advisers, was chided by the President for scaring people by warning of a looming depression. Mr Kahn, in his next speech, simply replaced the offending word, saying “We're in danger of having the worst banana in 45 years.” America's economy once again has a distinct whiff of bananas.

 

rule of thumb	правило, основанное на практическом опыте; проверенный способ/ метод;общее правило
economic indicator	экономический показатель
emerging economies(markets)	развивающиеся рынки; страны с быстро развивающейся экономикой: например, страны ВRIC
double-digit drop	резкое снижение, выражаемое двузначной цифрой
money supply	денежная масса в обращении:количество денег в обращении в экономике на определенную дату, имеющихся в наличии для сделок и инвестиций в экономике
monetary policy tighten monetary policy loosen/ ease monetary policy	денежно-кредитная политика ужесточать денежно-кредитную политику смягчать денежно-кредитную политику
credit crunch	кризис кредитования; ограничение кредитования; ужесточение условий кредитования; обвал/ кризис кредитно-финансовой системы
deflation	дефляция

NOTE:

1) with GDP falling by around 30% between 1929 and 1933. *history shows*- так как ВВП сократился примерно на 30% за период с 1929 по 1933 год 

2) higher government spending ** - рост государственных расходов

lower interest rates** - снижение процентных ставок

Прилагательные в сравнительной степени, выступающие в качестве определений, чаще всего переводятся существительными, определяемое существительное ставится в родительном падеже.

         3) when countries were on the gold standard *** - когда национальные валюты были "привязаны" к золотому стандарту...