The Straits of America

Jan 12, 2012 Nouriel Roubini

Macroeconomic indicators for the US have been better than expected for the last few months. But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012.

NEW YORK – Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life. And consumption growth has been relatively resilient.

But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?

First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable.

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Nouriel Roubini

Writing for PS since 2007
152 Commentaries

Nouriel Roubini, Chairman of Roubini Macro Associates, is a former senior economist for international affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank, and was Professor of Economics at New York University's Stern School of Business. His website is NourielRoubini.com, and he is the host of NourielToday.com.

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Ben Leet Feb 24, 2012

In October 2011 Roubini and Alpert and Hockett released "The Way Forward", a lengthy recommendation, see The New America Foundation. In this present article he emphasizes only one remedy, U.S. exports. In The Way Forward the authors recommend three "pillars": 1) a public jobs program, $1.2 trillion over a five year period, 2) a debt restructuring program targeting real estate (housing) and finance, and 3) global reforms restoring balance to world trade. Since 1979 the CBO reported the top-earning 1% of households increased their income share from 8% to 17%, post-taxes and post-transfers. The lower-earning 80% of households lost the 9% transfer of income to the top 1%. There is no credible evidence that this trend will lessen, even the modest tax increases suggested by Obama will do little to revive demand and purchasing power for the 80% who are facing increasing stress. Marriner Eccles, the former Chairman of the Fed during the Great Depression, said the economy is like a poker game, when the losers run out of credit, the game is over. That's why he recommended public job creation and strict regulation of finance. Unemployment dropped 1933-1937 from 25% to 9.6%, and in the 1940s public job creation reduced it to under 2% in 1943 and 1944. The labor market (wages) is very deflationary under our present, 2012, conditions. This dire economic condition is staring us all straight in the face, and its remarkable that so few understand it. My blog, http://benL8.blogspot.com, I suggest more remedies, more analysis.
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Kristy Mayer Feb 16, 2012

You argue that rising income inequality will dampen consumption growth, contributing to sustained below-potential growth in the United States. But in making this argument, you simply assume without any explanation that rising income inequality is a foregone conclusion. Rising income inequality has been an ongoing trend for many years now, and one could postulate that it likely will continue – but this is still just a claim that remains to be proven.

One reason why rising income inequality may seem a foregone conclusion is the degree to which it is entrenched in the U.S. tax system. However, the tax system, despite appearances to the contrary, is not immutable. Many prominent economists have suggested ways to recalculate tax rates (e.g., Diamond and Saez, 2011) or reform the system as a whole to more appropriately tax America’s wealthy, which would work to mitigate rising inequality.

Reforming the tax system is clearly not the silver bullet that will stop completely rising income inequality or eliminate the output gap. But, citing rising income inequality as a one of five reasons why United States’ economic growth is below potential and simply assuming that it will continue into the future is unproductive. Arguing that rising inequality dampens growth provides an opportunity for you to underscore the urgency of the active debate on tax reform and other ways to reduce income inequality. Rather than summarily dismissing rising income inequality as an irremediable part of the problem, you should reference the active debate and recommend that reversing the trend of rising income inequality be considered as part of the solution.
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