Cross-posted from Credit Writedowns
Economic Cycle Research Institute co-founder Lakshman Achuthan was on Tech Ticker yesterday discussing the outlook for the economy. Business Insider does a good write-up of his commentary, highlighting the fact that the ECRI has yet to signal a double dip. However, I wanted to add a few comments as well. ECRI’s underlying message is this: we are in a decade-long post-credit crisis struggle which will mean high unemployment even if policy makers focused on jobs (which they have not, I would add).
I agree with this forecast. When I began Credit Writedowns in March 2008, I wrote:
I am cautious about the long-term outlook for the global economy and the U.S. economy in particular. The likely outcome for the next decade is one of sub-par global growth with short business cycles punctuated by fits of recession.
Achuthan explains that this too is the root cause of why he thinks the jobs picture is going to difficult for the US. In essence, Achuthan is saying he expects a series of what I have been calling Shiller Double Dip Recessions. This dovetails with my view of an austerity-induced initial dip followed by the recession-punctuated lost decade thereafter.
Achuthan also explains well that in the short-term the jobs picture has already been set by previous policy decisions. He expects the monthly jobs numbers to continue to be weaker than earlier in the year. If we get a double dip recession, “by definition, the unemployment will be spiking” he says.
Obama’s failure to understand where we are in the economic cycle and the relationship to historical precedent has been catastrophic to the conduct of economic policy and critical in his missteps. There is more to Obama’s misfortune than a bad economy.
I would add that anything the US President and Congress do now will only be relevant in the medium-term as the election of 2012 nears. I have repeatedly indicated Republicans will be unlikely to support these current job initiatives. Instead they will focus on trimming government expenditure.
The key here is that it does no good for the Republicans politically to compromise with President Obama. His policies are rightfully seen as failed. The right thing to do politically (but not morally) is to try and strike as much contrast to the President as you can, especially if it makes him look more failed. So that means favouring gridlock and pushing deficit reduction, looking for spending cuts and so on – even if it leads to a government shutdown stare-down as it did under Clinton. Is this the right thing to do? I don’t think so, if only because it reduces the number of potential positive economic outcomes. But I am speaking now more from a forecasting perspective than one of advocacy.
If you listen to the Republican voices in Congress and the Republican contenders for US President, this is what you will hear – and will continue to hear. I believe this will mean recession – and recessions cause tax receipts to plunge and outlays to increase, making the deficit larger. Does focusing on deficit reduction reduce deficits? No, an expansionary fiscal contraction will prove illusive. Focusing on deficit reduction will increase the deficit.
This is looking more like Hoover every day. So, the President will have to hang his re-election hat on being able to claim that he prevented an even worse economic environment, hoping the economy doesn’t double dip.