Sun August 12, 2012
Taking A 'Doomy' Look At The Economy
Originally published on Sun August 12, 2012 9:40 am
LINDA WERTHEIMER, HOST:
And now another gloomy financial message. Nouriel Roubini is a New York University professor and former economic advisor to the Clinton administration. And he has the nickname Dr. Doom. Roubini is next in our series of conversations with topnotch economists. But unlike some of his colleagues, he does not claim to have a crystal ball; he makes warnings, not predictions. Nouriel Roubini joins us from New York.
Welcome. So why do they call you Dr. Doom?
NOURIEL ROUBINI: Well, I prefer to be called Dr. Realist because, you know, I predicted the global financial crisis earlier on. That's why sometimes people refer to me as Dr. Doom.
WERTHEIMER: So are you taking a doomy view of the U.S. economy in the near term?
ROUBINI: I am concerned. Economic growth has been very slow. And at the end of the year, there'll be this fiscal cliff and some element of fiscal drag.
WERTHEIMER: The fiscal cliff is the decision that the Congress has to make, to either renew the President Bush's tax cuts or permit rather drastic cuts in spending and increases in taxes to take place.
ROUBINI: Yes, if all of those things were to occur, the drag on the economy could be very, very large and growth could be close to zero by next year. And we could be stuck and sulk again about stalled speed or a double-dip recession.
WERTHEIMER: Now, as you pointed out, you did predict the crash in 2008. But you predicted something that was even more dire than what has happened. You talked about stock markets closing for days or weeks, stock prices going through the floor. Is anything that you're looking at pointing toward anything that serious this time?
ROUBINI: Maybe not but there is certainly risk that by next year a perfect global storm may occur. By next year, you might have a disorderly breakup of the eurozone. You might have the fiscal drag leads to another recession in the U.S. China, growth is slowing down - they might have a hard landing. Other emerging markets growth is stalling. And in the Middle East, there is a risk that there may be a military confrontation between Israel and U.S. on one side and Iran of the issue of nuclear proliferation.
So there are these five risks. If they were to materialize, then we'll have another global recession and it could be worse than the one we had in 2008/2013.
WERTHEIMER: But isn't it also true that Germany might decide to take responsibility for some of the smaller countries and cover their debt; that the Chinese, since they are in such serious control of their economy, that they could manage this landing; that energy prices have been falling in the United States because we are doing so much production on our own, that perhaps we wouldn't hit a horrible bump if Middle Eastern oil quantities went down?
I mean there are ways in which it could go this way, or it could go that way.
ROUBINI: You're absolutely right. I would argue that in Germany in the core of the eurozone, there is also bailout fatigue. They say, for example, the Greeks had a Big Fat Greek Wedding, not for long weekend but for the last 20 years. We give them a first bailout, a second bailout, many Germans want to pull the plug.
In China, you have a new government at the end of the year. Either they move away from net exports, from too much savings, from too much capital investments towards more consumption, or otherwise by next year China could have also a hard landing.
In the U.S., we have shale gas. I think it has been hyped a bit too much. It's going to help the energy needs of the U.S., but that revolution may take 10 to 20 years. If there is a war in the Middle East next year, the shock to all prices is going to tip the U.S. into a recession because we're not going to be energy independent for at least another decade.
WERTHEIMER: Is there anything that the Federal Reserve can do to avert this crisis that concerns you?
ROUBINI: Yes, the Federal Reserve can help and so far it has helped. The fact that the Great Recession of '08/'13 did not turn into another Great Depression is due to the fact that we learned the lessons of the Great Depression. And it means that in the short term we need more fiscal stimulus. The reality however is that we're running out of policy bullets. Politically, we're not going to be able to bailout the banks and the bankers for a second time. I think there will be a political backlash against it.
So if things are to turn sour compared to '08, when we had all the policy bullets, this time around would be worse.
WERTHEIMER: One of the big themes in this election year is a call for austerity. If that means that the government should drastically cut spending, would it help? Would it avert a crisis or would it bring one on?
ROUBINI: Unfortunately the U.S. political system is in a gridlock. And the reality is that in the medium time we have to reduce our budget deficit, and the way to do it is going to be a combination of reforming Social Security and Medicare on one side, but also gradually increasing the tax burden because right now it's very low, especially on those who can pay.
And while we have to do fiscal austerity, if we do too much of it, next year or in the next couple of years, the risk, like in the eurozone, is that we end up into another recession because austerity, however necessary, in the short run has a negative effect on economic growth.
WERTHEIMER: Thank you very much.
ROUBINI: Pleasure talking with you today.
WERTHEIMER: Nouriel Roubini is a professor at New York University. He owns his own consultancy firm. We reached him in New York. Transcript provided by NPR, Copyright National Public Radio.