Definition of Depression

Merely semantics. It's all completely arbitrary anyway. What label do we put on a steep economic contraction? It could have to do with political affiliation. The party in-power calls it a "recession", the party not in-power calls it a "depression". Alternatively, it could depend on what socioeconomic class you're in. The top 10% might call it a "recession" while the other 90% calls it a "depression". In the end, is it really worth debating?

For example, the IT job market is in recession since 2001...the "recovery" (the weakest on record) of the early 2000s wasn't so for large segments of the population.
The economy, essentially, was using your house as an ATM machine and spending on imports, vacations and the occasional remodelling.
The only good job markets were in housing, dead-end part-time retail or tourism related positions and health care.
Not a definition of an healthy economy to me, regardless of what the official GDP numbers were.
We should start considering the overall health of an economy in a more sophisticated way than just looking at the GDP figure...what do you think?

Good question! I think we definitely need a more holistic approach to really examine where we are. In my macroeconomics class our professor said that a good determining factor as to if we are in a recession or not is the unemployment rate because it is a lagging indicator. Which means that employers speculate on the state of teh economy before they actually begin to lay people off. The new unemployment rate was released on Friday. It rose from 6.1% to 6.5%. If people aren't working, they aren't spending which is 70% of our GDP. So even if we ignore the various components of the GDP no job = no income = no spending. This is a situation that won't change anytime soon.

A depression is when government intervention in the economy causes recessions within recessions. Say for example, the economy starts to pick up an bit, then the Obama administration, with the backing of a Pelosi house, comes up with tax plan like this one to help the poor.

"Businessmen, Roosevelt fumed, were obstacles on the road to recovery. He blasted them as "economic royalists" and said that businessmen as a class were "stupid."[36] He followed up the insults with a rash of new punitive measures. New strictures on the stock market were imposed. A tax on corporate retained earnings, called the "undistributed profits tax," was levied. "These soak-the-rich efforts," writes economist Robert Higgs, "left little doubt that the president and his administration intended to push through Congress everything they could to extract wealth from the high-income earners responsible for making the bulk of the nation’s decisions about private investment"

"As pointed out earlier in this essay, Herbert Hoover’s own version of a "New Deal" had hiked the top marginal income tax rate from 24 to 63 percent in 1932. But he was a piker compared to his tax-happy successor. Under Roosevelt, the top rate was raised at first to 79 percent and then later to 90 percent. Economic historian Burton Folsom notes that in 1941 Roosevelt even proposed a whopping 99.5-percent marginal rate on all incomes over $100,000. "Why not?" he said when an advisor questioned the idea"

Great Myths of the Great Depression
Mackinac Center

Joe, no one's suggesting such tax rates. Obama's plan would only put taxes back to what they were in 1998, and then only on those making over $250,000/year. That tax rate didn't exactly hurt the economy, now did it?

Republican and Democratic economic strategies are both sides of the same coin. Both seek to create effective injections of money into the supply-demand cycle. Democrats on the demand side, and Republicans on the supply side (hence "supply side economics").

It correlates to the "push" vs. "pull" strategies in marketing. You can either try to push a product through the distribution chain, or you can create demand that pulls the product through the chain. The pharma strategy of advertising drugs to consumers to that they go to their doctors and ask for it is a perfect example of "pull"... and it's been outrageously successful. "Pull" has proven to produce much better results than "push", and I tend to feel the same way about the Democrats "pull" economic strategy.

We can disagree, but let's not stake out extreme positions for opponents and then attack them for it. That's called a "straw man" debate tactic and it's very disingenuous. No one is suggesting 60%+ tax rates on anyone.

I agree with Joe Cushing. The worst possible thing to do is increase the upper tax bracket.

One thing the government could do to make sure stimulus goes exactly to the people who need it most, is allow income averaging for income taxes, once again.

If a person making $200K gets laid off, and earns $0 for a year (given how long it takes to get another such job), this is the best 'cushioning effect' that can happen, and will smooth out the boom-bust extremities.

Income averaging would be far better AND fairer than 'stimulus checks' or extensions to unemployment benefits.

I think we need a bit of clarity here

Joe

In the present system, the government ALWAYS intervene in the economy.
The very existence of a Central Bank means central planning of interest rates and money supply and we know how this end periodically.
Fiat money is another form of government control.
So get over it, government control and interference is here to stay.
Nobody here is proposing an outrageously high tax rate.
I like when some people always mention that the US has the second highest corporate tax in the world but they conveniently forget the universe of byzantine tax loopholes which allows in some cases to pay no taxes at all.
So let's take the loopholes away then we can talk.

Kartik

We are talking about fair tax rates.
I hate people getting bailed out, reckless homeowners and Wall Street bankers alike.
Maybe we should intervene more "surgically" in the application of the tax code.
If an entrepreneur invest to create jobs and value, new products and services etc, well, more power to him, we should encourage this and give him/her all the support needed and low taxation.
But, as I hate to bail out condo flippers, I want more punitive tax rates to "company flippers" at private equity firms that do not create a single job, no value, generate a lot of disruption and often leave a trail of wreckage behind them.
Their only "creativity" is taking advantage of cheap money to create nothing other then personal wealth.
Initially I agreed with the concept of a corporate raider in the 80's, whip in shape inefficient companies, jettison incompetent management and rebuild....but, as always happen, we abused a fair practice in principle aided by government actions (loose monetary policies, tax code recalibration, etc..) the government that many of these people despise so much.
Ask yourself why someone like Stephen Schwarzman, the CEO of Blackstone should get a significant lower tax rate (as it is at the moment) than a medical researcher which create actual products and benefit to the socety...
Like the infamous Gordon Gekko said in Wall Street "I create nothing...I own".
So let's distinguish between a real businessman and entrepreneur (like Bill Gates, for example) and a corporate leech and tax appropriately.

Finally, I agree with income averaging.

BW,

I didn't say we were going to have depression causing taxes. I just said that is one way to get a depression. There are many other things the government did at that time to push us into depression. Each one caused a new recession on top of the previous one. The question was about defining a depression. I don't think we are headed into one.

The point is, a depression is not a natural state of the economy. Only government action can put us there. Think of poor countries in Africa that are in a constant state of depression. They all have one thing in common--huge government road blocks to economic development. For other examples of what our government did to create the depression, google the artical I sited.

All that said Obama is not talking about taking us back to 1998. In 1998 the top income tax rate was 39%. Combine that with the medicare tax of 2.9% and you get a top marginal tax rate of 41.9%. The Obama plan will take us back to the 39%, plus the 2.9%, plus 12.4% social security tax. This brings the top marginal rate to 54.3%. We haven't seen these kind of taxes in a long time. I suspect it will lead to lower collections because it pushes us way to the right side of the Laffer Curve.

How can there exist some natural entity which is an economy without government intervention? Such a concept ignores the underlying nature of money and ownership, contract-based entities.
What we call an economy is the accounting and distribution of human activity and production, not the underlying production.
Don't forget that the "natural state" (without a governing body and social contract) in a land and resource-constrained world is that some starve, some kill and steal, and the ones that produce serve and are occasionally protected by the ones that kill and steal.

CompEng,

OK, lets change the word. Interference.

Getting in the way. Preventing people from profiting from business. Confiscating their wealth. I'm not talking about government acting as a referee to create a competitive environment here.

Let me put it another way. If we make no new laws, there would be no depression. In order to have one, the government would have to act in an a radically ignorant and or irresponsible manor--as it did when it created The Great Depression.

Joe, that's a nice idea, but I don't think there's a fundamental truth there, that you can't have a depression without government action. There is a bit of truth there, because a lot of little shocks cause their own little recessions and without dominant players like government warping the flows, the huge structural imbalances are corrected before they can cause a depression. But I think plagues, earthquakes, tsunamis, wars, etc. can also cause these problems. The greatest depression in the western world happened when the Roman empire fell and the fantastic specialized economy they built fell apart as communities lost contact with one another and as barbarian invaders came. The problem there was lack of government.

You do have a point. Certainly the Great Depression was largely created by our own government's policies. And in the past 30 years government kept stimulating us out of the recessions that could have fixed our imbalances, and now they're just going to do it more. So we'll build even greater debts as we fail to have the courage to fully face the fundamental imbalances that created our mess, and the failed economic maxims that let everyone celebrate the condition. There's no rescue from your own stupidity.

But capitalistic markets are a winner-take-all deal. Without government interference, and given sufficient time, the remaining monopoly or oligarchy that remains will do as much damage as government could. In fact, the big shots in Wall Street run government economic policy, and were and are a part of the problem.
In general, I'm a Jeffersonian. You have to break up the big guys and re-distribute wealth to some degree, or a few players dominate and destroy the market or you get to choose between the great options of tyranny or civil unrest as equal opportunity unravels (or both). What you lose in economic efficiency is well worth the price. This has worked really well for America, I think, but globalization really complicates the mix, because breaking up your monopolies just makes your businesses less competitive than the mega-corps outside your legal boundaries.

CompEng

Great Post

Joe

Manipulation of interest rates, value of money and fiat currency printing by the Central bank it is government intervention, not just acting as a referee.
So if we have to accept government intervention, it should be a "proper" inteference beneficial to all segments of society.
There is a nice book for you: "Saving Capitalism from the Capitalists" by Raghuram Rajan and Luigi Zingales of the University of Chicago Graduate School of Business.
It is a great reading.

So what does "beneficial to all segments of society" mean? If you're a Democrat that might mean those who have lost their jobs due to downsizing or people who have had their homes foreclosed on. If you are a Republican it could mean big business or wall street. It all depends on the way you look at it. Either way, some segment is going to feel the effects.