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Economist: Forget the Recession, This Is a Depression

With this morning’s news that employers laid off 524,000 workers in December, at least one prominent economist has some news of his own: “The economy is the jaws of a depression,” Peter Morici, a professor at the University of Maryland, wrote to reporters this morning.

What’s the criterion? Morici claims it’s this: Recessions correct themselves, while depressions do not.

Recessions are like stock market corrections—after a time, equity prices rebound without government intervention. Federal Reserve interest rate cuts and stimulus tax rebates and spending have shortened the lives and eased the impact of post-World War II recessions, but those policies did not end them. The economy self corrected.

By contrast, Morici writes, the troubles soon to be inherited by President-elect Barack Obama are more structural, stemming from “bad management practices at the large money center banks and the huge foreign trade deficit. These problems are not self-correcting.”

Trouble is, Morici adds, an enormous spending package alone won’t fix the problem.

The economy will not recover without fundamental changes in banking and trade policy. A large stimulus package, though necessary, will only give the economy a temporary lift but then unemployment will rise again and continue at unacceptable levels indefinitely without successively larger stimulus packages and huge federal budget deficits. The economy is a depression, not a recession.

The forecast lends truth to that great Onion headline that followed the election: “Black Man Given Nation’s Worst Job.”

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