Defining An Economic Depression

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The U.S. economy is in a recession — and some analysts fear a depression lies ahead. What constitutes an economic depression, which we have not seen since the 1930s? Adam Posen, deputy director of the Peterson Institute for International Economics, explains.


So, we keep hearing about all these signs that the economy is getting worse including this one. This week, the Commerce Department said the economy contracted at a rate of 6.2 percent. That's almost double what experts previously projected, which raises the question, at what point do we call it a depression? We're joined now by Adam Posen. He's the deputy director of the Peterson Institute for International Economics. So, Adam, when you take a look at this week and everything that's going on, what do you make of things? Are you worried enough that this could be called a depression?

Mr. ADAM POSEN (Deputy Director, Peterson Institute for International Economics): I'm pretty sure it's not going to be called a depression, but I certainly have been getting more depressed over the last couple of months. I got more upset or pessimistic basically since December, and I've begun to see things happening now that are worrisome. There were events that I thought would lead to good outcomes like the big monetary policy action that I haven't seen to have had as much effect. There were events that I was worried might happen that did come to pass like the total collapse in global trade. And then there were stuff that I and many other people just didn't foresee which is the kind of resonances back and forth, feedback loops in the banking system around the world, that they were much deeper than any of us - even the most pessimistic realize. So, you put all that together, it's depressing, but I still don't think it's a depression. A depression we've only really seen once, and that was in the '30s, and that was when you had growth collapsing, trade collapsing, unemployment skyrocketing, not just severely but persistently for many years. I mean, we're still expecting unemployment to top out in the us at 11 percent which is serious, but that's not a depression, especially if it comes back down within a couple of years.

COHEN: In your opinion, what can and should the Obama administration be doing to make sure we don't truly slip in to a depression?

Mr. POSEN: Well, the Obama administration, in my opinion, along with the Federal Reserve has done two of, say, four things that should be done. The big two that they've done are break the budget on fiscal stimulus, try to get the money out there directly to the states, and get inflation out of your heads for now and spend a lot of money on monetary policy, trying to pump up the economy.

COHEN: Some economists are truly skeptical of the Obama administration's plans for recovery. Do you think that in any sense, what they're proposing is making things worse not better?

Mr. POSEN: No, I think the temporizing of the banks is probably making things worse. But if the stress tests that Geithner - Treasury has proposed are really carried out in the next several weeks, that won't be that long. I have no doubt that the stimulus package is going to make things better. I have no doubt that the direct spending in human lives' terms at the state local government will make things better. Whether it will make things enough better to keep unemployment from rising, enough better to offset everything. I don't know, but I have no question that the direction is the right one.

COHEN: Adam, how much do you think semantics really influence things here? I mean, it is what it is whether or not we call it a depression. But to what extent do you think calling it such might affect the places that this economy is heading towards?

Mr. POSEN: Semantics are very important because they can both reinforce aspects of consumer or household confidence or how much people are willing to save that haircut money another week and therefore the haircutter doesn't have any money to spend. And they also influence the public debate. If you view it as a truly Great Depression, a once in a 70-year event, then maybe you can mobilize and make decision you couldn't another wise make. So, there's a trade-off there, you would certainly not want to cry wolf by calling it a depression before you have to, but the hope is when the data calling it like you see it will mobilize action.

COHEN: Adam Posen is the deputy director at the Peterson Institute for International Economics. Thank you.

Mr. POSEN: Thank you for having me.

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