Professor Projects Likelihood of Economic Depression

The United States currently faces an approximately 20 percent probability of entering into an economic depression, according to a Wednesday Wall Street Journal opinion piece penned by Harvard Economics professor Robert J. Barro.

Drawing upon the financial statistics of 251 previous stock-market crashes and 97 depressions, Barro wrote that “the odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression.”

Barro also wrote that he was skeptical about the effectiveness of the current federal stimulus package.

“I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful,” he wrote. “But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.”

Fellow Harvard economics professor Kenneth S. Rogoff wrote in an e-mail yesterday that he found Barro’s analysis “highly informative” and “certainly more credible” than quantitative economic forecasts circulated by the Federal Reserve.

“I would guess that the risk of the US having a Japan-style lost decade, where the economy goes in and out of recession for years on end, is more likely than the risk of a catastrophic double-digit output collapse,” Rogoff wrote.

Rogoff also expressed the need for a speedy response by the Obama administration if the economic situation is to be rescued.

“The longer the Obama administration dithers over a decisiveand comprehensive fix to the banking system, the greater the risks,” Rogoff wrote.

According to Barro, America has been plagued by only two depressions since 1870—the post-World War I depression and the Great Depression.

The Harvard economist’s current piece came in the midst of an economic downturn that has seen the stock market fall to its lowest levels since 1997.

Barro said he could not give further comment on his piece yesterday.