Recession Vs. Depression: What’s The Difference?

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The United States economy is in a medically induced coma. Can we revive the patient when we want to and need to? The U.S. economy has taken a huge hit in the midst of the Covid-19 pandemic. President Trump says that the U.S. may be heading into a recession because of the coronavirus. Economists have implied that a recession may be looming. Some have even made comparisons to the Great Depression. Based on this week's just absolutely hideous jobless claims number, we could expect a real doozy. See, this park has become a tug of war between the bears bracing for a possible depression if we can't stop Covid. Is this hyperbole or is the U.S. economy truly in deep trouble? First, let's define a recession. We typically define a recession as two quarters of negative GDP growth. The National Bureau of Economic Research will look back at GDP growth, they'll look at gross domestic income, they'll look at employment numbers and they will put it together to try to identify the start and end of the recession. In terms of why we use the word recession, we use it because the economy is not behaving normally. We are in a recession. Whether you call it a technical recession in the sense of two quarters, we are in a deep, deep downturn. Numbers can be revised later on. So a recession is typically declared after the fact. That said, there are signals we could be entering a recession right now. To put it in the single word, it's been disaster. We're going to be looking at one quarter at least of negative economic growth, if not two. It's almost impossible to imagine that we're not already in a recession. Almost certainly the recession started in the month of March. But Dr. Rouse notes that this recession isn't like the others we've experienced. Typically, our recessions have been induced because of an issue in the financial market and oil prices. It's usually induced from some sector in the economy. This is from a public health scare and a public health crisis. Economists are using different models to attempt to predict how the economy will respond to the coronavirus pandemic. There's two models. One is a natural disaster, and when a hurricane passes, everyone returns to work and an economy snaps right back to normal. Another model is a financial crisis. And after a financial crisis, it often takes five to 10 years for the economy to return to normal. I think that financial crisis scenario of a five to 10 year slog back to normality is more likely than the natural disaster one. But either is possible. How easy is it going to be to get the economy going again? Will it be V-shaped, the recovery as strong as the decline was steep, or will it be U-shaped, where we had a precipitous decline? And that's going to make it difficult for us to recover quickly? Because of the ongoing health crisis, it's harder to tell how this will pan out. So if it's still too soon to call this a recession, why have some economists started talking about a depression? A depression is a long recession. So, it's the length of time and also the depth. So there are some forecasts that unemployment could get up to 25%, 30%. Those are very large numbers. The Great Depression, unemployment reached 25%. Most people think that we are likely to reach those levels of unemployment. If in December of 2021, the unemployment rate is above 15 %, then we're in something like a depression. So it's not how high the unemployment rate reaches, it just needs to stay high for some time. So a depression is possible, but not necessarily imminent. The Great Depression happened in part because of a dramatic failure of policy. The policymakers then were not taking the types of steps that policymakers are taking now. I think it is unlikely that we have anything like a repeat of the Great Depression. Two months of high unemployment is terrible, but we can protect families against that. A decade of high unemployment would represent a really epic failure of economic policy of a type that I think is very unlikely to happen now. All of this speculation begs the question: What happens next? Typically, when the private sector is not fully functioning, the public sector steps in. And so this is a typical role for government and for the federal government and state governments. The federal government's got more capacity here and that would typically be where the the federal government would be trying to support incomes. What's unusual here is we actually don't necessarily even want people out doing the kinds of things that the federal government could have them do. We don't want people in groups of more than 10 people together. It's important that policymakers continue to do really big things. So don't be complacent and assume everything's gonna be fine. Do put pressure to make sure big things keep happening. And if they do, I think we can prevent the very worst from happening here. The more we step back from our economic activity, the faster we'll actually recover and emerge from this. The fact is the pandemic is likely to continue. How long it continues will depend on how strongly we maintain social distancing. I remain optimistic that we will get through this and that there will be another side. But it will require some patience and some cooperation and some generosity towards our neighbors right now.
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Channel: CNBC Make It
Views: 264,586
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Keywords: CNBC Make It, Make It, CNBC, How To Make It, Entrepreneurs, Starting A Small Business, Business Success, Small Businesses, Finance Tips, Career Tips, Work Hacks, Lifehacks, Money Management, Career Management, Managing Business
Id: B45r6FIF3WE
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Length: 6min 24sec (384 seconds)
Published: Wed Apr 22 2020
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