I criticise Martin Wolf, my colleague, very rarely. Primarily because I tend to agree with him. I also admire him greatly. Less importantly, public disagreements, such as what is to follow, tend to cause more trouble than they are worth.

That said, Martin’s new-found insistence on calling our current economic woes a depression is silly and dangerous.

The definition of a “depression”

Economists tend to define a recession as two quarters of declining output. A depression is much worse.

It is easiest to explain Martin’s new definition of a recession and a depression in a diagram. In the left panel below the blue and red lines show paths of economic output with the previous peak and the pre-crisis trend shown in dotted black lines. Martin defines a recession as the time period between A and B on the left panel – ie the period when output is declining. He defines a depression in two different ways in his article, both the period (A to C) when output is below the pre-crisis  level and (A to D) the period when output is below the trend growth implied before the crisis.

I have a simpler, but less precise definition. The blue line E in the right panel is a recession. It is bad. The red line F is much worse and it is a depression. The difference has no precision but is the difference between bad and awful.

Silly

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