Good Question

• Apr 29, 2008 11:09 pm US/Central
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  Good Question: Could Recession Become Depression?

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Good Question: Could Recession Become Depression?

(WCCO) When the President of the United States has a news conference and admits, "It's a tough time for our economy," you know it really is tough. Most economists believe that the United States is in the middle of a recession, but could that recession become a depression?

"Most everyone who's alive today only knows about the Great Depression through history classes," e-mailed Keith McDowell, Minneapolis resident. "Worst-case scenario, and the economy takes a turn for the worst, what would that look like today?"

McDowell isn't panicking; at least if he is so are many of us. According to a Gallup Poll conducted in March 2008, 59 percent of Americans think it's at least somewhat likely we'll be in a depression within two years.

"Is this the recession that will become a depression? It's hard to say," according to Professor Raymond Robertson, an Economist at Macalester College in St. Paul, Minn.

"Any of the potential shocks that we face could easily slip us into a very, very serious depression," said Robertson.

The Great Depression, starting in 1929, was the last depression in the United States. If a recession is 2 quarters of decline in Gross Domestic Product (the output of the economy), a depression is more like "2 to 3 years of recession," according to Robertson.

The Great Depression featured mass unemployment of around 33 percent.

"There were a number of major changes in policy that allowed us to prevent depressions ever since then," he explained.

Nowadays the Federal Deposit Insurance Corporation insures bank deposits to prevent a run on the banking system like there was in the 1930s.

If the stock market drops 30 percent in one day, it automatically halts trading for the day. Plus, there aren't as many tariffs for world trade, and the Federal Reserve takes a more active role in managing interest rates.

"We learned a lot," said Robertson. "And if you look at recessions over the last 50 to 60 years, they've become more mild, they've become shorter."

However, Robertson is one of many economists who worries the safeguards won't protect us from a growing storm.

"We don't know exactly when the hurricane is going to hit, but everyday that goes by these problems become more and more serious, it's going to hitting eventually," he said.

Robertson singles out the "astronomical" trade deficit, the decline of the dollar in favor of the euro and the national debt of $9.3 trillion.

"If they stop lending, we're gonna have to repay that debt ourselves," according to Robertson. "We'd have to cut spending, which could cause a depression given the scale. Or we have to raise taxes, which could cause a depression given the scale. Or the United States government would go into default."

"We're going to have to do some very serious sacrifice and work in order to correct these problems," he added.

 

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