Shutting down economy creates risk of causing depression

The term “depression” doesn’t have a standard definition, but “recession” does. A recession is when there have been two consecutive quarters of declines in gross domestic product. A depression is generally considered a prolonged economic downturn that lasts years and leads to a more than 10% drop in GDP in a given year.

Real GDP increased 2.3% in 2019, according to the Commerce Department. Current projections from Goldman Sachs show GDP contracting 5.7% for the entire year for 2020, which would be a drop of more than 10% when compared to the growth in 2019.

Still, Harry Broadman, an economist and the managing director and chair of the Emerging Markets practice at Berkeley Research Group, told the Washington Examiner that he has “never heard of a definition for a depression.” Yet while the term is not well defined, President Harry S. Truman was able to encapsulate it when he said, “It’s a recession when your neighbor loses his job. It’s a depression when you lose your own.”

Rodriguez Valladares sees evidence that the nation is heading toward something similar to the Great Depression based on the millions of jobs lost over the past few weeks.

“What we’re seeing right now is closer to the Depression than it was in the 2008 financial crisis,” she said.

During the Great Depression, which lasted from 1929 to 1939, millions of jobs were lost. Its record high of 15 million occurred in 1933, when nearly a quarter of the working population was unemployed. During the Great Recession, which ran from December 2007 to June 2009, almost 9 million jobs were lost.

These numbers were eclipsed by the more than 21 million jobs that evaporated between March 15 and April 11 of this year. Jeffrey Miron, an economist at Harvard and the Cato Institute, a Washington think tank, expects this number to increase.

“We haven’t seen all of the layoffs and all the [business] closures and all the people who are going to end up unemployed yet,” he told the Washington Examiner.

Rodriguez Valladares foresees workers not quickly returning to their old jobs after the economy eventually rebounds.

“When people are fired … they are not immediately brought back. They’re not redeployed, and some may never come back,” she said, adding, “I think we are going to be in a recession for several quarters, and then, recovery will be slow.”

The number of lost jobs over the past month has been astounding in terms of how quickly they vanished. The total nearly equals the 21.5 million net jobs that were created between the end of the Great Recession in June 2009 and the end of February 2020, according to the Labor Department.

Rodriguez Valladares reasoned that the current crisis developed so quickly that there was little data that companies could depend on to prepare, shore up resources, and save jobs. Instead, companies find themselves financially vulnerable as they try to survive the economic shutdown.

“In the past, we have had a lot of data, months’ and sometimes even years’ advanced notice, to see that we are headed into a recession. Here, this was quick — and very little public warning,” she said.

Mark Hamrick, a senior economic analyst at Bankrate.com, sees the speed at which businesses closed to slow the spread of the virus dragging the economy into negative growth. He projected that quarterly declines in GDP would surpass those from the Great Recession.

“What’s most striking about the current economic downturn stemming from the coronavirus pandemic has been its speed and magnitude. The annualized contraction in the nation’s GDP in the current quarter is expected to be a stunning double-digit percentage decline,” he wrote in an email.

Goldman Sachs projects that GDP for the second quarter will be -34% at a seasonally adjusted annualized rate.

The most significant decline in GDP during the Great Recession occurred in the fourth quarter of 2008, when it was -8.4% compared to the previous quarter. Aside from the Eisenhower recession of 1958, when GDP was -10% during the first quarter of 1958, it has never dropped by double digits when compared to previous quarters. Quarterly measurements of GDP were not recorded during the Great Depression, according to Rodriguez Valladares.

“Those series of data really didn’t start until after [World War II],” she said.

A chief difference between the current crisis and both the Great Recession and Depression is that it was a catastrophe of choice. Leaders called on companies to close, which didn’t happen during the other crises.

“Every single sector has been totally shut down,” Rodriguez Valladares said. “In the Great Depression, you had people who were making money because there were still parts of the economy that were open.”

Reopening the current economy depends heavily on testing citizens to see who has the disease and who doesn’t, according to Broadman.

“You can be an economist or a medical professional, but the same facts need to be revealed as to who has tested positive — who’s tested negative,” he told the Washington Examiner. He added, “Testing, to me, is the far more important issue to instill confidence [in reopening the economy] than a vaccine. A vaccine obviously is going to be important, but we know that it is going to take some time.”

Testing in the United States has reportedly flattened recently, and so far, less than 1% of Americans have been tested. Romina Boccia, a director at the Heritage Foundation, warned that if the current decision to keep the county locked down persists for too long, it would likely send the economy to a depression.

“I don’t think the economy can withstand being frozen like this for over a year,” she told the Washington Examiner, adding that if the current shut down continues, it “would certainly cause a very, very deep depression.”