Professor Barro: 20% odds of a depression

Harvard Economics Professor Robert Barro has looked at many nations for the factors that precede a depression. He tries now to determine whether the current U.S. recession can get much worse:

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 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. …

In the post-World War II period, the Organisation for Economic Co-operation and Development (OECD) countries were strikingly tranquil up to 2008. The worst macroeconomic event in that period came in Finland in the early 1990s. Sweden also faced a financial crisis in the early 1990s, though it reacted quickly and is now being touted as a possible guide for leading the U.S. out of its current economic crisis.

War no help. Barro also found that, generally, wars make recessions worse. The U.S. experience during World War II was an exception, possibly because the rest of the world was being hammered while the States were relatively untouched.

The hope:

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.

1982 was bad. Being lucky to have another 1982 isn’t much luck. Let’s hope we’re far luckier than that.

Frank Warner

Comments

[Sara Moore]

The government did the right thing repfinancing the banks after Lehmans crash But one has to be careful about deficit financing. My book website www.howhitlercametopower.com
reveals that Germany was a strong country in the Great Depression and had the money to reflate in 1933. The dash to full employment later was financed by reneging on debt and the non-payment of bills, proving the old adage - someone, somewhere has to pay!
Sara Moore