At what point does a recession become a depression?  Our colleague Bob Bronson of Bronson Capital Markets Research notes that there doesn’t appear to be a hard set of rules to help answer this question. “As far as we know there is no theoretic or empirically defined gradient for quantifying the full range of economic declines from recession to depression,” Bronson notes in a recent e-mail. “Please advise if you have information otherwise.”

Anecdotally, a recession supposedly is signaled when your neighbor loses his job, a depression when you lose yours. There is a painful truth in this, since the economy, bad as it is, undoubtedly looks much worse right now to someone who has been unemployed for a few months. But when we consider the big picture, unemployment is nowhere near the levels of the 1930s.  In fact, by 1933 slightly less than 27% of all wage earners – about 15 million workers – had been fired or laid off.

Could things get that bad this time around? It seems doubtful, since so many workers have relatively secure jobs in local, state and federal government. But we see under-employment becoming a much bigger economic problem than it was during the 1930s. While even in the worst of times the vast majority of workers may be able to avoid filing for unemployment benefits, their incomes could nonetheless fall to subsistence levels.

Beating the Draw

Indeed, many, if not most, of the country’s top earners ware unlikely to show up statistically as unemployed, even if they are down-and-out. In New York City, for instance, a complete economic collapse looms because such high-wage categories as investment banker, stockbroker and, soon, realtor, have crashed and burned.  But we’d be surprised if even a small fraction of those whose incomes went to zero after they’d grossed more than $1 million per year in good times are collecting unemployment benefits now, or will collect them in the future. Why would some high-powered consultant who cleared a million dollars last year want to go on the dole if he thinks he can “beat the draw” of weekly unemployment benefits totaling $500- $600 at most? 

Under the circumstances, we could see huge under-employment in this country without a rise in official unemployment much above 10 percent. Be that as it may, below is a scale worked out by Bronson that could be useful in qualifying the pain of hard times based on unemployment levels.  “The idea behind this exercise,” he explains, “is that using the word ‘depression’ loosely is not meaningful or helpful without a reasonable definition.  While we warned more than 10 years ago of a coming ultimately deflationary economic Supercycle Winter, we still don’t see it becoming a ‘depression’ by any reasonable definition – hence the table below – notwithstanding that the last such Supercycle Winter included The Great Depression.” Here’s the table, which contains linear unemployment numbers that Bronson deems less useful than their logarithmic equivalents: 

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-- Posted Friday, 19 December 2008 | Digg This Article