Barro on the odds of a "depression"

First of all, I'm not sure there is no objective measure of a depression (although Barro gives a definition below).

We know what "stagflation" (stagnant economy and thus high unemployment along with high inflation) looks like (see: mid-late 1970s).

We know what a bad recession looks like (see: 1981-1982).

We know what a "Great" depression looks like (see: 1929-1940)-- with its peak of 25% unemployment and 19% unemployment six years into the New Deal.

So, presumably, a (regular) depression is somewhere between the early 1980s (which we haven't reached yet) and the 1930s.

In any case, what will happen? No one knows. Even if the government quits screwing around with a market that is trying to adjust, who knows?

Here's Macro stud Robert Barro in the WSJ...

Central questions these days are how severe will the U.S. economic downturn be and how long will it last?

The most serious concern is that the downturn will become something worse than the largest recession of the post-World War II period -- 1982, when real per capita GDP fell by 3% and the unemployment rate peaked at nearly 11%. Could we even experience a depression (defined as a decline in per-person GDP or consumption by 10% or more)?

The U.S. macroeconomy has been so tame for so long that it's impossible to get an accurate reading about depression odds just from the U.S. data. My approach uses long-term data for many countries and takes into account the historical linkages between depressions and stock-market crashes. (The research is described in "Stock-Market Crashes and Depressions," a working paper Jose Ursua and I wrote for the National Bureau of Economic Research last month.)

The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

Our research classifies just two such U.S. events since 1870: the Great Depression from 1929 to 1933, with a macroeconomic decline by 25%, and the post-World War I years from 1917 to 1921, with a fall by 16%. We also assembled long-term data on GDP, consumption and stock-market returns for 33 other countries, sometimes going back as far as 1870....

The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression.

The bright side of a 20% depression probability is the 80% chance of avoiding a depression. The U.S. had stock-market crashes in 2000-02 (by 42%) and 1973-74 (49%) and, in each case, experienced only mild recessions. Hence, if we are lucky, the current downturn will also be moderate, though likely worse than the other U.S. post-World War II recessions, including 1982....