What to Call It?

It now seems clear that we are in the midst of an exceptionally deep and prolonged economic downturn, but one of the difficulties in coming to grips with it is the problem of finding the right label.  The familiar term “recession” doesn’t do it justice.

A number of economists and journalists call it “The Great Recession,” bulking up a regular or normal recession to fit the bill.  In their impressive new book, Eight Centuries of Financial Folly, Carmen Reinhart and Kenneth Rogoff call it the “Second Great Contraction.”  And last week in The New York Times, Paul Krugman came out with the “Third Depression.”  He observed that unemployment “remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly.”  (See “The Third Depression.”)

In the midst of the credit crisis two years ago, government officials and bankers struggled to avoid a complete collapse of our financial system, one that they thought would surely bring on a “Depression.”  And when the system did not fail, they thought they had averted it.  Perhaps not.

Right now, of course, we can’t really know how long it will last.  Stocks occasionally rally, but that may not be the best indicator of how the downturn is affecting most of us.  At this stage, the recovery from unemployment seems very slow and discouraging. State and local governments are cutting services drastically.  Housing is still depressed.  Loans are hard to come by.  Pundits are preoccupied with how the economy will affect the November elections, and who will be blamed.  They seem to be less concerned about how it is affecting our lives.

We are in uncharted territory.  What experts choose to call it depends less on what they know than what their theories suggest.  Those who minimize the radical nature of what we are experiencing – who call it a “Recession” of one kind or another – are trying to fit it into the conventional framework of the booms and busts we have lived through since the end of World War II.  The underlying message is: “It’s bad, but not that bad.”

Reinhard and Rogoff are trying to take a longer view, actually an eight-century view, perhaps more of interest to economists and scholars.  The policy implications of that are not yet clear.

Krugman, on the other hand, views the crisis as a critic of government policy.  For him, a mistaken emphasis on the perils of deficit spending will recapitulate the mistakes that led to the “Great Depression,” virtually insuring that it will happen again.

It would be a mistake to see these differences as abstract disputes, relevant only to specialists.  Each suggests a different level of urgency in combating the deprivation and pain of unemployment, closed schools, reduced services, and financial insecurity.