The "d" word
By Scott Sumner
I don’t know exactly why the stock market has been plunging, but this report provides some context:
Boston Mayor Marty Walsh announces libraries closing, construction projects halting
Think about the implication of that report, and the fact that it was treated as an afterthought in the Boston Globe newspaper. In recent days we’ve seen many seemingly extreme announcements being made in one city, and then quickly spread to many others. If construction were to shut down in most American cities, along with the already obvious sharp declines in many other sectors due to social distancing, then it’s hard for me to see how we can avoid a very steep slump in the economy.
The term ‘depression’ is not clearly defined, other than generally being regarded as an unusually bad recession. If the “Great Recession” of 2008-09 had occurred in the 1870s or the 1890s, it certainly would have been called a depression. There’s also an important distinction between a very deep but short slump, like 1920-21, and a more shallow but prolonged slump, like the Great Recession. Of course the 1930s depression was both very deep and very prolonged.
I have no ability to predict the path of the epidemic, and thus won’t attempt to predict the economy over the next few years. But if I had to hazard a guess as to what’s causing the steep slump in stock prices, it would be a growing realization that the US (and other Western countries) would prefer another bad recession of unclear duration to an outcome where several hundred thousand (or more) died of coronavirus. This will lead to a shutdown of a sizable portion of the economy.