It is hard to get odds on whether we are heading into a depression ("decline in per-person GDP or consumption by 10% or more") by looking at US data because "the US macroeconomy has been so tame for so long."  So writes Robert Barro, professor of economics at Harvard and a fellow at Stanford's Hoover Institution, in today's Wall Street Journal.  So, in an effort to find the likelihood we are in for a depression, Barro and Jose Ursua looked at historical data from 34 countries, paying close attention to "linkages between depressions and stock market crashes."  And he concludes that there is a 1 in 5 chance we will see a minor depression:

Looking at all of the events from our 34-country history, we find that there is a 28% probability that a "minor depression" (macroeconomic decline of 10% or more) will occur when there is a stock-market crash. There is a 9% chance that a "major depression" (a fall of 25% or more) will occur when there is a stock-market crash. In reverse, the chance that a minor depression will also feature a stock-market crash is 73%. And major depressions are almost sure to have stock-market crashes (our data show the probability is 92%).

In applying our results to the current environment, we should consider that the U.S. and most other countries are not involved in a major war (the Iraq and Afghanistan conflicts are not comparable to World War I or World War II). Thus, we get better information about today's prospects by consulting the history of nonwar events -- for which our sample contains 209 stock-market crashes and 59 depressions, with 41 matched by timing. In this context, the probability of a minor depression, contingent on seeing a stock-market crash, is 20%, and the corresponding chance of a major depression is only 2%. However, it is still the case that depressions are very likely to feature stock-market crashes -- 69% for minor depressions and 83% for major ones.

 You can read Barro's op-ed in today's Wall Street Journal here. 

For information on Barro and Ursua's working paper, Stock Market Crashes and Depressions, go to the National Bureau of Economic Research.