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Harvard economist Robert Barro has an op-ed in today's Wall Street Journal trying to pin down the probability of a depression. He pegs it at 20 percent. He's also got a longer paper detailing his analysis of 195 stock market crashes and 84 depressions. The abstract:
Long-term data for 25 countries up to 2006 reveal 195 stock-market crashes (multi-year real returns of -25% or less) and 84 depressions (multi-year macroeconomic declines of 10% or more), with 58 of the cases matched by timing. The United States has two of the matched events--the Great Depression 1929-33 and the post-WWI years 1917-21, likely driven by the Great Influenza Epidemic. 45% of the matched cases are associated with war, and the two world wars are prominent. Conditional on a stock-market crash, the probability of a minor depression (macroeconomic decline of at least 10%) is 30% and of a major depression (at least 25%) is 11%. In a non-war environment, these probabilities are lower but still substantial--20% for a minor depression and 3% for a major depression. Thus, the stock-market crashes of 2008-09 in the United States and other countries provide ample reason for concern about depression.So the 20 percent is for a "minor depression." Full paper here. Link via Noam Scheiber.
