http://www.huffingtonpost.com/2010/10/29/nouriel-roubini-fiscal-train-wreck_n_775870.html
http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html
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"Thought is action in rehearsal." (Sigmund Freud)
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As we reach the end of October, we'd like to thank two of our former students who have forwarded data that is germane to what's happening right now in the economy. They both know that my position on "economics" (which is not that different than most current and former Top 500 executives) is that it leaves something to be desired from the point of view of professional consensus on anything.
From 2/14/09, we have Greg Mankiw's post ("News Flash: Economists Agree") which is enlightening as it applies to what economists CAN agree on (based on various polls of the profession). We'll list the first few:
1 A ceiling on rents reduces the quantity and quality of housing available. (93%)
2 Tariffs and import quotas usually reduce general economic welfare. (93%)
3 Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
4 Fiscal policy (e.g. tax cut and/or government expenditure increases) has a significant stimulative impact on a less than fully employed economy. (90%)
5 The United States should not restrict employers from outsourcing work to foreign countries. (90%).
There are 14 consensus items that Mankiw has put together and they're good: read his post attached.
Moving on to Nouriel Roubini, he was quoted yesterday in the Financial Times as indicating that the U.S. economy is a "train wreck" waiting to happen. He went on to say that the current U.S. situation "... risks ushering in a period of stagnation featuring minimal growth, high unemployment and deflationary pressure."
For many reasons, we tend to listen to what "Dr. Doom" has to say. He was, after all, one of the first economists (and the most well known) to predict the worldwide financial crisis. In addition, his 2010 book, "Crisis Economics (A Crash Course in the Future of Finance)" not only describes what has happened up to now in world economics but predicts what needs to be done in the future (or else). (Paranthetically, we get no income from recommending his book.) No book comes close to Roubini's for that subject matter.
Back to Roubini in the Financial Times. He credits fiscal and monetary stimulus for preventing another depression. But he said that further quantitative easing will have little effect on U.S. growth in 2011, "... so fiscal policy should be doing some of the lifting to prevent a double dip recession." The problem here is that, while we would like to remove "politics" from the equation, the elections coming up Tuesday could have an effect on the ability of the U.S. government to boost fiscal stimulus: if the polls are correct, enough Republicans who are against fiscal stimulus could be elected, in which case those considerations end.
Roubini even goes on to predict what could snap the economy back into another recession: the trigger could be a debt rollover crisis in a major U.S. state government.
Quoting Roubini again: "The worst of the coming fiscal train wreck will be prevented by the Fed's easing. But the risk is (Obama) ... will then preside over ... a Japanese style stagnation, where growth is barely positive, and deflationary pressures and high unemployment linger."
While we would like to disagree with Roubini, we don't have any facts to refute his position. And, neither does anybody else.
Roubini's prediction of a 40% chance of a double dip recession seems real to us. Paul Volcker's prediction of prolonged unemployment also seems real to us.
This would correlate with a new Associated Press poll (of 43 leading private, corporate and academic economists) released yesterday that found economists thinking that unemployment won't drop to a historically normal 5.5% to 6% until at least 2018. This latest quarterly AP survey shows economists are pushing back their estimates (significantly) of when key barometers like hiring, spending and economic growth will signal strength.
We will continue to hope for the best but things do not look promising.
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I don't know about Roubini. You're right, there's a lot of data to support what he says. But even a broken clock is right twice a day.
ReplyDeleteWhen you make your life/career out of predicting doom, you will inevitably be right. But that doesn't necessarily mean that you will continue to be right, either.
He's definitely a glass is half empty kind of guy. He may be right now, he may be right tomorrow, but inevitably if he keeps predicting the way he has for a good chunk of his career, he'll start being wrong again too.
I prefer predictions from people with a less tilted view of the world.
Craig: as always, great stuff! I think it would be accurate to say that we are in the middle of what Roubini predicted. And, if this goes on thru 2018, he'll be the one in the dark tunnel with the flashlight.
ReplyDeleteLike you, professor, I am not big on economics. All their nice little theories might work well if you live in a fishbowl. But the world, and people in particular, are far too complex to be put into models like they'd like to do.
ReplyDeleteLike Craig, I think "Dr Doom"'s predictions are likely to be too negatively skewed.
In particular, I believe there are fundamental differences between the US and Japan which make it unprobable that the US will follow the same route. Among them:
--demographic structure: while both the US and Japan are aging, the US' population is younger and growing faster.
--tolerance for public debt: due to political pressure, I don't see the US growing its public deficit to the level we see in Japan (200% GDP!!).
--entrepreneurial culture/capacity to adapt: the ongoing and very rapid "constructive destruction" of the US comes in stark contrast with the rigid economic and social structures of Japan.
I see more of a scenario "a la Europe", with subdued growth and high employment for the years to come. Unfortunately I also think that we still cannot rule out another financial crisis. Wall street is too big compared to Main Street. The right incentives are not there as long as you can make far more money doing high-frequency trading than on any other more productive endeavors (at least in my view) such as making cars, finding new drugs etc.
Forgot to attach this article about Japan. It helped me understand what living in a deflationary environment means.
ReplyDeletehttp://www.nytimes.com/2010/10/17/world/asia/17japan.html?_r=1&?WT.mc_id=WO-SM-E-FB-SM-LIN-TGD-101810-NYT-NA&WT.mc_ev=click
Christine: wonderful stuff! We are not Japan. I believe Krugman had something on that recently (and I did too!). I'd prefer to look at this a little differently: what's going to happen in this decade (in the world) that we don't anticipate? I'm about to do "The Next 100 Years" for my honors international class and I'll be asking them to think about that as we go thru countries. On Europe, I might temper your very logical position with the thought that immigration (especially from Mexico) will keep America young(er) as we progress thru the 21st century. Europe does not appear to tolerate (is that a good word?) immigration as well as the U.S. The "political position" against immigration here will flip when we realize how much we need those coming in. Again, "kudos" for your observations, as always!
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