08.06.11

Will We Double-Dip?

Market slides, lethargic job growth, and a credit downgrade show an economy on the brink. The Daily Beast asked 10 economists how bad it will get—and if there's reason for hope at all.

Occasional—and Repeated—Recessions for the Foreseeable Future
Victor Lippit, professor of economics, UC Riverside

Whether or not we have a double dip is beside the point. We are facing years of sluggish growth and elevated unemployment with occasional dips into recession. To deal with this situation we need (1) near-term stimulus (mainly fiscal, since interest rates cannot go below zero), (2) a clearly defined medium- to long-term plan to reduce the resulting indebtedness, and (3) a new set of institutions to become firmly established.

Since President Obama failed to articulate his own medium- to long-term debt-reduction plan (the State of the Union address afforded a great opportunity) and still has not done so, he created the opening for the Tea Party to wreak its economic damage, which has become especially evident in recent weeks. The administration still has not crafted a coherent plan for infrastructure projects, so that when spending is needed and possible, it can take action. Since the Republicans are hindering the establishment of new institutions (health-care reform and financial-system reform, for example), institutional uncertainty will remain a damper on economic activity for a prolonged period. As for the markets this week, this is purely an example of negative investor psychology; with zero interest rates and record profits, there is no objective reason for the sell-off of stocks that we have seen.

"With or without the second dip, my forecast is persistent high unemployment and a lost decade."

We're Not Japan—Yet
Robin Marshall, director of investment management at Smith & Williamson in London

There’s a chance the economy will survive without double-dipping, but as we’ve seen in the last eight or nine quarters, the growth numbers have been very disappointing relative to where the Feds have been forecasting them. As you know, the Feds were talking about 3 to 4 percent growth at the beginning of the year, and have had to downscale those forecasts extensively. We now are bumbling around in the 1 to 2 percent growth region, which is dangerously close to stall speed. Consumers are getting screeched as well, so overall it’s quite a dangerous mix. I think there’s a tail risk where this crisis starts to resemble Japan, where consumers hold off spending because they want to pay down debts, and companies in turn are reluctant to hire because they’re concerned about demand growth, and that creates a downward spiral.

The good news is the Feds realize that they have to be alive to the risks and be aware of repeating the Japanese experience. Japan went through a process of denial, and by the time it acted it was too late. Behavior had adjusted; people were expecting the deflation to last and were holding off on spending. And that went on for years, rather than quarters. So at least the Feds are moving much faster than the Bank of Japan did. But we may have to grind out this 1 to 2 percent growth trajectory for a while.

This Will Be a Lost Decade
Cihan Bilginsoy, professor of economics, University of Utah

Now that Congress and the president have tied the hands of the government to stimulate the economy and expressed their willingness to consider the kooky idea of a balanced-budget amendment, there is not much reason to be optimistic about the future. Consumer and investor confidence are unlikely to recover under these conditions. With or without the second dip, my forecast is persistent high unemployment and a lost decade.

It All Depends on Europe
Rick Ferri, author of The Power of Passive Investing: More Wealth With Less Work

The bottom line is that it all depends on what’s happening in Europe. What’s going on in our market is a fallout from what’s going on in their market. We’re slowly doing what we want to do: We’re adding jobs; our GDP is crawling up. If Europe had a stronger economy and didn’t have these problems with Greece, Italy, Portugal, and Ireland, their economy would be much stronger. And remember, they’re our biggest trading partners. Forty percent of our foreign sales and production is in Europe. Roughly 20 percent of the S&P 500 earnings are coming from Europe. We’re talking so much about jobs in the United States, but one of the ways to create jobs that is really being overlooked is trade. We haven’t signed any trade deals in the last two and a half years, and we need trade. That’s going to drive jobs in this country.

Lack of Coordination Is Holding Us Back
Mohamed El-Erian, author of When Markets Collide, chief executive of PIMCO

A recession is not the base case, but it's something that has to be monitored very carefully. The reason is this concept of stall speed. Because of the nature of our economy, it's not enough for us to have 1 to 2 percent growth. We need more than that. We already have a large unemployment problem that is becoming more structural in nature, and we have overindebted sectors that need growth. So the likelihood is that we won't have a recession, but we will feel like we're in a recession. The U.S. faces structural headwinds to growth, undermining job creation and the safe de-levering of overstretched balance sheets. You see this in the labor market, the housing market, the credit market, and public finances. These are all problems that were years in the making and require structural solutions. So therefore what we need is an overriding growth and employment strategy that has simultaneous and coordinated movement on these four key areas. So far, what we've gotten is very ad hoc and not sufficiently coordinated.

We Never Emerged From Recession in the First Place
Michael D. Intriligator, professor of economics, UCLA

My view is that we never emerged from the recession and that the NBER Dating Committee made a mistake in suggesting that the recession ended two years ago, in June 2009, given the unemployment, the foreclosures, the corporate and personal bankruptcies, the unprecedented "For Lease" signs on commercial properties in our downtown areas, the financial difficulties almost all our states and cities are in, etc.

The Markets Are a Sideshow
David Levine, Haas Economic Analysis and Policy Group

A great economist once said something along the lines that the stock market has predicted nine out of the last five recessions. My point is, a terrible day for the stock market is surely a sign of concern, but it’s not one of the major factors for a recession. The big dangers were already there. There were a few big risks—all of them have to do with the fact that for the first seven or eight years of this century we were in an unrealistic credit boom. The lingering harm of the financial crisis for the U.S. and Europe means another recession is not guaranteed, but a risk.

With Wall Street Dictating Policy, We're Doomed
Mary King, professor of economics, UC Berkeley

Yes, I think that we're headed for a double-dip recession, or at minimum a long, unnecessarily drawn-out period of high unemployment that is particularly destructive for young people, as well as the less educated and members of ethnic minorities.

I'm appalled that Obama and the Congress have pandered to feel-good, soundbite, uninformed political considerations driven by think tanks organized for the wealthy, completely abrogating their leadership responsibilities.

Against all the evidence of economics, the stimulus was half the size it should have been, and unconscionably wasted in part on tax credits, rather than being focused on big investments in physical and social infrastructure that could have made a real difference. And we should have played a far more powerful role in the financial institutions we rescued with taxpayer money, taking over management and providing real relief to homeowners in over their heads.

Rather than follow up with a decent stimulus, we're pursuing a moronic policy focused on debt reduction that will create such a drag on the economy as to be utterly ineffective. Worse, the cuts are all going to be focused where they'll do the most damage.

Obama needs to climb out of Wall Street's pocket and hire some decent economists. Stiglitz, Akerlof, Krugman, and Blinder would all be much better.

Double Dip or Not, We'll Have Long-Term Stagnation
Mark Thoma, professor of economics, University of Oregon

My biggest worry right now is that we face a prolonged period of stagnation. For example, the employment gap is currently in excess of 14 million jobs, and there's nothing to indicate that we will begin creating jobs in sufficient number to reabsorb these workers any time soon.

But the question is whether the employment and output gaps will get worse—i.e., are we headed for a double-dip recession? While I don't think that's the most likely scenario, it can't be ruled out by any means. However, one of the two outcomes—a prolonged period of stagnation or a double dip—is highly likely, and in either case both monetary and fiscal policymakers could take steps to try and make things better. Unfortunately, undue fear of deficits and inflation have tied their hands, and at this point I'm left hoping that policymakers, fiscal policymakers in particular, don't do anything to make it even harder for the economy to recover. So I see a long, slow recovery ahead, a substantial risk of a double dip, and an impotent and perhaps counterproductive policy response.

Inadequate Growth Is No Better Than a Double Dip
Daphne Greenwood, professor of economics, University of Colorado-Colorado Springs

Tea Party policies, including a fixation on federal spending, are playing Russian roulette with our economy. As a result, we do run a higher risk of a double-dip recession than we did several months ago. But most likely we will limp along with (only) inadequate economic growth. That's nothing to cheer about! Why are people afraid of the double dip but not of inadequate growth? It's all just a matter of degree of the level of economic pain, and both outcomes are self-inflicted.

The deficit debate was an exercise in addressing the wrong problem. What we need to be worried about is a jobs deficit, along with infrastructure, education, and clean-energy deficits. Addressing all of those could easily put people back to work if the willingness to invest public money in them were there.

Reporting by Lizzie Crocker, Caroline Linton, and Andrew Carter