Dr. Doom: Assessing Efforts to Restart the Economy

(10 am. – promoted by ek hornbeck)

Dr. Nouriel Roubini, the chairman and co-founder of Roubini Global Economics and professor of Economics at NYU’s Stern School of Business, joined Rachel Maddow for a two part interview on the economic state of the US economy. What he had to say was not encouraging. The transcripts to both segments are below the fold.

The 3rd segment was on-line only. It was diaried here: Dr. Doom: Nothing Has Changed

Transcript for the first segment:

MADDOW:  I know you have been through something really, really brutally bad when the guy who accurately predicted how bad it was going to be has the nickname Dr. Doom.

When the history of the Obama presidency is written, and not the gossipy, anonymous he said/she said invented dialogue chat books that pass as journalistic history now, but when the actual history, when the long-term history of this presidency is written, the defining issue, the defining context will be how he started, the massive financial crisis that was still exploding when this new president took over.

The Dr. Doom who predicted the housing collapse and the financial crisis and the us-almost-having-a-second-great-depression, all before it happened, is Nouriel Roubini.

After being coronated as the guy who got it right because of that foresight, Professor Roubini gave an interview in the summer of last year that, honestly, when I read it, improved my mood for months.

Despite the whole Dr. Doom thing, he was generally positive about the way we were coming out of the crisis and, in particular, about the way that Tim Geithner and the rest of the president’s economic team were understanding and responding to the problem.

That was last summer.  Now, a little bit more than a year later, he’s back to doom.  Professor Roubini telling the “New York Times” this month that we are staring down the barrel right now of another housing collapse, another $1 trillion in housing losses.

He said, quote, “The real estate market, for sure, is double dipping.”  Remember what happened to the rest of the economy after the first dip, after the first housing dip?  Now we are having a second one?  Are things about to go south again?  Hard and fast?  And if so, does anything else in politics matter?

Why even bother tracking legislation and polls and candidates up and down if all of that will be rendered moot in the next presidential election?  Because I don’t care for Tom Brady and the vote is for who should be patriots quarterback.

I don’t care if you are cauliflower and the vote is for palest cruciferous vegetable.  I don’t care if you are snow and the election is for what’s cold.  If the economy goes south again, it does not matter what else happens in politics.  No one gets reelected to anything if unemployment is at 15 percent.  

Joining us now is Nouriel Roubini, chairman and cofounder of Roubini Global Economics and professor of economics at NYU’s Stern School of Business.  Dr. Roubini, thank you so much.

(APPLAUSE)

NOURIEL ROUBINI, CHAIRMAN AND CO-FOUNDER, ROUBINI GLOBAL ECONOMICS:

Thank you.  Glad to be here.

MADDOW:  Are you bummed out by people with the Dr. Doom thing?  Do you feel like you have to put on a sunny visage to counteract that?

ROUBINI:  No, I’m just myself.

MADDOW:  It’s very scary to see you, the way I think about that.

(LAUGHTER)

MADDOW:  How sick are we still?  Can you diagnose the state of the recovery, sort of post-financial crisis?

ROUBINI:  Well, I would say there are some good news and there are some bad news.  The good news is the recession is over.  There’s an economic recovery.  And next year, growth might be around three percent.  So it’s sustaining a recovery.

But there are several downside risks.  The first one is that in spite of growth, firms are not hiring.  Unemployment rates are still at 10 percent, almost, including, of course, workers who are partially employed at 17 percent.  

So firms find ways of producing more by having less workers, so this growth is not leading to reduction of the unemployment rate.  This is a becoming a real issue.

The second issue is that the housing market is double dipping.  Quantities are falling.  Home prices are falling again.  We artificially stimulated the demand for a few months through this tax credit.  As soon as it expired, home sales collapsed again.

The third problem is that state and local governments are semi bankrupt.  You know, Europe is Greece and Ireland, the U.S. – Arizona, Nevada, Florida, California, Illinois, even New York is in trouble.  So there’s a risk of the state governments to (UNINTELLIGIBLE) fiscal problems.

And at the federal level, we’re kicking the can down the road.  You know, we have just passed this tax stimulus.  This is going to add another $900 billion to the deficit over the next two(ph) years.  So things are improving, but there are also a number of downside risks.

MADDOW:  On the issue of how best to respond, one thing that I don’t understand about the way a number of countries are responding, and I think some states are sort of moving in this direction too, is the idea that the way out of this mess is through austerity, by dialing back quite sharply on spending.

I understand why that helps with debt and why that’s, therefore, important.  But doesn’t that also completely choke off the possibility of any economic growth?

ROUBINI:  It the does.  The difficult trade-off that most countries are facing is that there are huge budget deficits.  The (UNINTELLIGIBLE) of public debt is rising, but the recovery is still anemic.

So in the short-term, you need a stimulus, because the government has not recovered.  But if you run in large deficits forever, you might eventually end up with a train wreck like in Ireland, like in Greece.

To me the way to square the circle is by having a short-term stimulus, because the economy is still recovering in a weak way.  Demand is not strong.  But then, commit today to raising taxes, not today, but over in the future, gradually, and committing today about cutting some forms of spending over time.

But you backload all those spending cuts and increases in the revenues, and you maintain a stimulus in the short-term.  So if you can credibly commit to have some light at the end of the tunnel with discipline over the next five, 10 years, then you need a stimulus in the short run.

The bond market vigilantes aren’t going to wake up and punish you.  But right now, in the U.S., I think we’re doing the short-term stimulus, but this means a lot of it is going to people who don’t need it, like the very rich.  And we’re not doing anything about the medium-term fiscal so it’s a bit of a mess.

MADDOW:  And we have to take a quick break.  When we come back, I want to talk a little bit about the political realities, about what you think might be the best thing to do, and whether those things are going to be more or less politically possible with the new Congress.

Transcript for second segment:

MADDOW:  The funding for the federal government expires at 11:59 p.m.  tomorrow.  So if you’re staying up late to see the lunar eclipse tonight and looking for an excuse tomorrow, there you go.

Congress will try to put together another stopgap spending bill to avert a big government shutdown.  And if you look down the road, where the funding of the government has been kicked, you may be able to see the debt ceiling down there that’s also looming down that road.  Congress votes every year to raise the debt ceiling so the U.S. does not break its promise to pay back its loans.

Republicans this year are suggesting that the government should just break its promise to pay back its loans.  They are threatening to vote no on the debt ceiling rise.

And if you were counting on the fed, the Federal Reserve, to be able to jigger the money supply to respond to another economic calamity it if happens next year, I have two words for you, Ron Paul, who will head up oversight of the Fed in the new Congress, and whose attitude toward the Fed is that he would like to please not exist.

Back with us now is Nouriel Roubini, chairman and co-founder of Roubini Global Economics and professor of economics at NYU’s Stern School of Business.  He is famous for calling the last financial crisis before it happened.

Dr. Roubini, are you worried about political constraints ahead in the next Congress, that they will be even worse than the current political constraints?

ROUBINI:  Yes, I do very much worry about it, because we have total gridlock right now in Washington.  The two parties are completely divided.  The Republicans think that they won during the last election, takes the House.  

They believe that Obama could be a one-term president, so they won’t have a strong incentive to collaborate on anything.  They’re following this Leninist approach, the worse, the better is right for them.

If the economy gets worse, if there’s no achievement of any sort, Obama might be a one-term president.  So I suggest gridlock, the two parties divided as much as they’ve ever been.

MADDOW:  Do you think if the Republicans recognize a political incentive to actually do economic harm to the country, because it politically benefits them?

ROUBINI:  Effectively, yes.  The elections are based on the economy.  If the economy does well, then usually the incumbent party and the president gets re-elected.  If not, it’s the economy, stupid.  We know it, right?  So, so far, if there’s any economic recovery, it could do many things.  It can go off track because of the deficit, because of state and local government, because of the unemployment rate and many other things.

And the two parties are completely divided right now.  I think the parties have moved sharply to the right.  I think the Democrats are not realizing fully that they’ll have to make sacrifices, cut some entitled spending.

You know, we have to cut spending in order to raise revenues.  About 10 percent of GDP budget deficit eventually is unsustainable.  We could end up like in Europe, but we’re not doing anything about it.

MADDOW:  Looking ahead to an impending skirmish, if not fight over the debt ceiling, if the U.S. ends up not voting to raise its debt ceiling, in laymen’s terms, what does that do to our economic position in the world?

ROUBINI:  Well, there could be nervousness in the markets.  You know, the markets wonder the investors around the world what’s going on in the United States?  The two parties are so divided they cannot even agree on raising this debt limit.  So I think the risk is there’s going to be financial turmoil, and that’s playing with fire, I would say.

MADDOW:  If you could wave a magic wand and be economic dictator for a day, if you could – if you wanted to target unemployment, for example, specifically, if you thought that was something that needed more attention than anything else, all political constraints were off the table, you could do anything, what would you do?

ROUBINI:  Several things.  You know, I proposed a few months ago that we should have a temporary cut of the payroll tax, not just for employees, like was decided, but also for employers, for two years, maybe shouldn’t be paying their tax.  That’s going to reduce their labor costs by six percent and induce them to hire more workers.

That’s the first thing that will have a boost in terms of job hiring because they’re flush with cash, trillions of dollars.  They’re not spending.  They’re not hiring workers.  That’s really a problem.  

And it’s a vicious circle.  They’re not hiring workers because they say there’s no demand, but there’s not going to be demand if people don’t have jobs and income and they cannot spend.  So we’re in this vicious circle.

So that’s the first thing.  The second thing is that, you know, many of these people are unemployed.  At this point, they’re going to lose their skills, their human capital and the stigma of not having a job for a year or two.

So anything we can do to increase skills, education, retain them, make them employable, together with a tax cut that induces firms to hire them is going to jump-start job creation.  And it’s critical.  If we’re going to do it, we’ll have an army of unemployed people forever.

MADDOW:  And it’s worth the spending to do that?

ROUBINI:  Yes.

MADDOW:  Nouriel Roubini is chairman and co-founder of Roubini Global Economics.  He’s professor of Economics at NYU’s Stern School of Business and somebody who’s both worrying and comforting at the same time.  Thank you, sir.  Appreciate your time.  

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    • on 12/27/2010 at 17:35
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