A funny thing is happening on the way to economic recovery: certain economists are warning that things are going to get worse; that these include some of the very few economists who warned about this economic implosion before it happened ought to make them among the very few economists to whom we actually pay attention. If we care about credibility. And about the direction of the economy.
NYU Professor Nouriel Roubini was so singled out for his dire predictions about the direction of the economy, during the housing bubble, that he was given the moniker "Dr. Doom." People don't like hearing what he has to say. But given the record, we all need to. For months, he has been warning about rising unemployment. As Mary pointed out, on Tuesday, Roubini's warnings now are taking on a more urgent tone.
Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%.
While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession.
And he warns that after both the 2001 and 1990-1991 recessions had ended, unemployment continued to rise for another year and a half! Which, in the present case, means rising unemployment through next summer! When we will be in the midst of an election which will largely determine the ability of President Obama to implement his agenda for the rest of his first term! Frightened yet?
The average length of unemployment is at an all time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer.
He sees unemployment peaking around 11%, and remaining very high for at least two years. And that doesn't include the underemployed, as employers cut hours, which he says will equate to another 3,000,000 lost jobs. He says the recovery will be weak, and the likelihood of a double dip recession is increasing. But he does have an answer.
There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers.
Extending unemployment benefits is not enough. We need the government to create jobs. And quickly! And in an October interview, Roubini also warned of an impending crash in commodity prices. Which is just what we need. His overall answer?
I don’t believe in market discipline. It doesn’t work. That was the ideology of the last 10 years; self-regulation means no regulation. Market discipline doesn’t exist with irrational exuberance and reliance on internal risk management models that don’t work. Nobody listens to risk managers, because it’s risk takers that make the profits. The reliance on ratings agencies that have their own conflicts of interest, the reliance on soft-touch regulation, the focus on principles instead of rules—that particular regulatory philosophy has been a disaster, and we’ve learned it the hard way. We have to go to simpler rules, tougher rules and more binding rules. That’s the right approach.
Jobs and regulation. Which brings us to another of those very few economists who warned about the current economic crisis. Paul Krugman. That Nobel Prize guy. A couple weeks ago, he had this to say about the question of a WPA-type jobs program:
As it is, job-creation efforts are generally indirect. Tax cuts and transfers in the hope that people will spend them; aid to state governments in the hope of averting layoffs. Even infrastructure spending is routed through private contractors.
You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective; the WPA and CCC cost surprisingly little given the number of people put to work. Think of it as the stimulus equivalent of getting the middlemen out of the student loan program.
The problem being politics. Which makes little sense, given that the Democratic Party now controls the politics. Or ought to, given that we have the White House and both houses of Congress.
In a column, last week, Krugman reiterated:
Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.
The point is that we need to start doing something more than, and different from, what we’re already doing. And the experience of other countries suggests that it’s time for a policy that explicitly and directly targets job creation.
Jobs. A government stimulus based on the direct or only slightly indirect creation of jobs. And regulation? Referring to a recent post by UC Berkeley professor Brad DeLong, Krugman writes:
Big financial institutions are a small club, with a shared interest in sustaining the system. Ever since the days of JP Morgan it has been standard practice, in times of crisis, to get major players together in a room and get them to forgo short-term profit maximization on behalf of the industry interests. It happened in the Panic of 1907; it happened in the Latin American debt crisis of the 80s; it happened in the LTCM bailout, which was financed by private firms, not the feds.
Also, individual banks are in a long-term relationship with the public and the government.
An insiders' club that is all about self-interest, and not about public interest. Which is sort of the Republican Party ethos. And suggests that the government ought to be forcing a public interest agenda, whereas it recently hasn't been. It's been catering to the banks.
Krugman agrees with DeLong, that the risk of an actual depression is rising.
Why? Because bank-friendly policies have squandered public trust in all government action: try talking to the general public about stimulus, and it’s all confounded in their minds with the deeply unpopular bailouts.
By itself, the AIG story would be damaging enough. But it’s part of a pattern — and that pattern has ended up undermining the economy’s prospects, big time.
And DeLong, himself? After more than two years of saying there was no chance of another Great Depression, he's changed his mind.
In my estimation the chances of another big downward shock to the U.S. economy--a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it.
We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030. The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.
For an overall perspective, on the political dynamics, Joan Walsh just warned:
So while I'm not worried about President Palin, I remain worried about President Obama. I'm particularly concerned that his increasingly triangulating, anti-deficit administration will do the wrong thing, morally and politically, and move to the right, without understanding that some right-wing rage could be rechanneled by acknowledging its roots: That the economic system seems rigged for the have-a-lots v. the have-a-littles, and despite their promises, the Democrats haven't done enough to change that. Palin can't change any of that, but Obama can. There's still time for him to do so, but the clock is ticking.
It's time for the Democrats to be Democrats.