Thursday, October 14, 2010

Roubini: How to Avoid the Double Dip; U.S. Increasingly Vulnerable to Fall Back Into Recession

Foreign Policy has the latest article by Noriel Roubini.

Dr. Roubini says that the U.S. economy looks increasingly vulnerable to falling back into recession and that flirting with stall speed, an anemic rate of growth that can lead to collapses in:

  • spending,
  • consumer confidence,
  • credit, and
  • other crucial engines of growth.
 In other words, a double dip or the Great Recession, Round II:

"Whatever the term, we're talking about a negative feedback loop that would be devilishly hard to break".


 "If Barack Obama wants a realistic shot at a second term, he'll need to act quickly and decisively to prevent this scenario".


The cause? He says that near double-digit unemployment is the root of the problem.
"Without job creation there's a lack of consumer spending, which represents 40 percent of domestic GDP. To date, the U.S. government has responded creatively and massively to the near collapse of the financial system, using a litany of measures, from the bank bailout to stimulus spending to low interest rates. Together, these policies prevented a reprise of the Great Depression. But they also created fiscal and political dilemmas that limit the usefulness of traditional monetary and fiscal tools that policymakers can turn to in a pinch".


Roubini says that Obama should reduce payroll taxes for both employers and employees as the reduction for employers will lower labor costs and allow the hiring of more workers. For employees, the added take-home pay will get people spending again.

He says this can be funded by allowing Bush's tax cuts for people making more than $250,000 to expire while keeping in place those for middle- and low-income earners, whihc are the vast majority of Americans.

"After two years, when U.S. growth is hopefully more robust and the pace of private-sector hiring has picked up steam, Obama can afford to phase out the payroll tax cuts. But the income-tax increases for the rich? They'll need to stick around".

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