Roubini: For unemployment "the worst is yet to come"

Nouriel Roubini, writing in the New York Daily News , said on Sunday that “unemployed Americans should hunker down for more job losses” given the likelihood of a job less recovery. This was as gloomy a piece as I have seen from Roubini in the past few months. He has clearly become more downbeat about the long-term picture for the U.S. economy.

The article begins:

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%…

…we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

This sounds dire. As a result, Roubini goes on to call on the Obama Administration to take direct action on jobs. Extending unemployment benefits is not going to cut it.  Roubini says we need:

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. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

long-term-unemployment With statistics showing that the rate of long-term joblessness is at the highest since the Great Depression, Roubini joins an increasing number of economists who are calling on the Obama Administration to take the employment situation more seriously.

Paul Krugman has said that we are now in a liquidity trap. Therefore, we need to subsidize jobs and promote work sharing as Germany is doing.

I have made similar arguments about quantitative easing for the past year. Monetary policy is effectively useless – and is merely creating bubbles.

The Obama Administration is moving into deficit hawk mode at the wrong time as this will only worsen the jobs situation and lead to a double dip recession. Instead, I have called for a payroll tax cut or a job subsidy.

Randall Wray, a professor at the University of Missouri-Kansas City, has also offered a unique job solution.

All of this is urgent, as Roubini indicates:

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession…

The damage will be extensive and severe unless bold policy action is undertaken now.

The Obama Administration is taking an ‘indirect’ approach. They do so for three reasons. First, they are afraid of being boxed in politically by taking more direct measures. They also see a need to defend their previous policy decisions.  But, Mark Thoma thinks part of the resistance to more direct measures is ideological.  In a post earlier today, he says:

Growth policy is an attempt to make the economy grow faster, and stabilization policy attempts to keep the economy as close as possible to that trend, i.e. to avoid business cycles.

When Republicans had the political microphone, they emphasized growth policy (because it allowed them to argue for what they really wanted, lower taxes, growth policy was simply the vehicle that allowed them to get there), and this was supported by academic work from people such as Robert Lucas who claimed that, from a welfare perspective, stabilization was of second order concern, growth policy was where policymakers should focus their effort if they wanted to enhance welfare. Summers’ remarks reflect this type of thinking.

The Obama Administration’s approach of focusing on deficit reduction without enough direct job measures is sure to keep unemployment elevated. In looking at the politics of economics I said recently:

I see jobs as the first area for Obama to attack. The question is whether he does this directly via some modified private-sector controlled W.P.A.-type program or indirectly via something like a payroll tax cut. After jobs comes foreclosure. Personal income and taxes are the least important area going forward (especially as any tax cuts will either increase deficit spending or have to be made up by tax increases elsewhere).

The Obama Administration is doing the opposite. They seem to have received the ‘deficit reduction comes first takeaway’ from recent state elections in Virginia, New Jersey, and New York instead of the ‘jobs come first takeaway.’ That is bad news for Democrats and it is also bad news for the hopes of a sustained recovery.


The worst is yet to come: Unemployed Americans should hunker down for more job losses – Nouriel Roubini, NY Daily News
Job Losses Mount, Enduring and Deep – Floyd Norris, NY Times (the long-term unemployment image is also from this story)

  1. NorthenSoul says

    “The Obama Administration is doing the opposite. They seem to have received the ‘deficit reduction comes first takeaway’ from recent state elections in Virginia, New Jersey, and New York instead of the ‘jobs come first takeaway.’”

    That anyone in the Administration could believe such a thing is beyond me. Since when such an abstract concept such as the “deficit” will be deemed of paramount importance to voters in a time where jobs are either scarce, non-existent or very insecure, health care costs keep rising and rising and rising, taxes not going lower, and services inflation (education anyone?) keep heading north and the value of their main asset (house) keep going down?

    Perhaps this has to do with the fact that there are 40%+ multimillionaires in Congress and the Senate, (versus 1% in the general population) while lotsa people in the White House are not exactly in the poor house either. These people have the luxury to think about the deficit, because circumstances of life that profoundly affect ordinary Americans are alien concepts to a significant number of our political elites.

    If Obama stay on this “must fight the deficit track” we are all toast. But so will he in 2012: he should get up to speed about the 2nd wave of credit crisis that is coming soon as related on NPR Fresh Air today.

    “Private equity firms buy undervalued or underappreciated companies, impose short-term improvements and sell them for a fast profit. Some of the companies they’ve bought include Hertz, La Quinta, Dunkin Donuts, and Toys R Us. Josh Kosman, a private equity expert, says that the way the firms have been able to buy these businesses — through leveraged buyouts — means the majority of the money for the buyout has come from loans that the firms dump on the company they’re supposedly fixing.

    Now burdened with debt, many of those companies owned by private equity firms are in danger of defaulting. In a new book, Kosman writes that it’s likely half of the 3,188 American companies bought by private equity firms between 2000 and 2008 could collapse. His book is called The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis.”

  2. RSDallas says

    Here we go again. Why is everyone in the current administration and most of the press shifting their focus to yet another symptom of the real problem? 1st: The consumer is re-trenching and not spending (the symptom) so let’s lower rates and try to blow the balloon back up. 2: #1 is not working so some bright fellow in Washington suggested that it would help if +-20% of our workers could get a job. Now we’ll subsidize jobs and create some tax incentives for the business sector in an attempt to increase employment (another symptom).

    Let’s go back to symptom 1: The consumer is not spending. Why?
    He doesn’t have the capacity to spend anymore because he can’t find the necessary cash to do so. Why can’t he find it? It no longer exists. Can’t borrow against the home anymore, his credit card is maxed out, his credit limit has been dropped, he is just to scared to CHARGE or spend anything because he wonders if he will have a job in the next 6 months or better yet that America is going to collapse due to its debt level. So how do you make the symptom go away or at least just subside?

    Concentrate your policies on how to lower the public and private sector’s DEBT! The only way to create purchasing power is to CREATE WEALTH (make more money) or lower the debt level so you can FILL THE TANK BACK UP. Hopefully only ½ full. The problem is too much DEBT. I’m getting sick to my stomach every time I read or hear from our great leaders that those darn banks just need to start lending more!!! What????? Wake up AMERICA; we are in this situation because we have taken out to much DEBT.

    Debt STEALS from the economy, it doesn’t create wealth. Now don’t get me wrong, very low debt can be a good thing. Just look at which sector has not had to be bailed out. TECHNOLOGY! Why? Just look at these companies balance sheets. Many of them do not have ANY debt. Now look at which companies our SMART government gave yours and my money to: Auto & Financial – Both rely on their customers to BORROW! America needs to CREATE wealth, NOT FABRICATE it! So what do you do?

    Concentrate on speeding up the deleveraging process. Get out of the way and let the system clean itself up. There are still trillions of dollars out there in our economy. The defunct assets will find a home.

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