This interview originally appeared at The Browser.
great depressionThe lessons of the Great Depression is our theme today. You are an expert on that topic. By all accounts, that’s one of the reasons why Barack Obama asked you to join his cabinet in the autumn of 2008. How well did economists understand the toll that the financial crisis of 2008 would take on the US economy as you prepared to chair the White House Council of Economic Advisers?
In the middle of the financial crisis, it was hard to estimate just how much damage had already been done to the economy and how widespread the impacts would be. But what economists certainly understood from history was that the crisis could be absolutely devastating if policymakers didn’t take steps to stop it and to mitigate the damage.
Right-wing websites are rife with references to “Obama’s Depression”. I know economists and partisan bloggers wield the word “depression” differently. When economists use the word, what precisely do they mean?
The word “depression” doesn't really have a well-defined meaning, unlike the words “recession” and “expansion”. The National Bureau of Economic Research defines a recession, for example, as a time when economic activity is declining. Often what economists mean by depression is the same thing other people mean – a really bad and exceptionally prolonged recession. Importantly, as bad as the current recession has been, it has been far less severe and prolonged than the episode we all agree was a depression, the Great Depression of the 1930s. To give you one indicator, in 2009 the US unemployment rate peaked at 10%. In the early 1930s it hit 25%.