Recent data suggest that job market conditions are not improving in the US and other advanced economies. In the US, the unemployment rate, currently at 9.5 percent, is poised to rise above 10 percent by the fall. It should peak at 11 percent some time next year and remain well above 10 percent for a long time. The unemployment rate will peak above 10 percent in most other advanced economies, too.
These raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the US labor force, for example, the unemployment rate is already 16.5 percent. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income — the product of jobs times hours worked times average hourly wages — has fallen dramatically.
Moreover, many employers, seeking to share the pain of recession and slow down layoffs, are now asking workers to accept cuts in both hours and hourly wages. British Airways, for example, has asked workers to work for an entire month without pay. Thus, the total effect of the recession on labor income of jobs, hours and wage reductions is much larger.
A sharp contraction in jobs and labor income has many negative consequences on both the economy and financial markets.
First, falling labor income implies falling consumption for households, which have already been hard hit by a massive loss of wealth (as the value of equities and homes has fallen) and a sharp rise in their debt ratios. With consumption accounting for 70 percent of GDP in the US, and a similarly high percent in other advanced economies, this implies that the recession will last longer, and that economic recovery next year will be anemic (less than 1 percent growth in the US and even lower growth rates in Europe and Japan).
Second, job losses will lead to a more protracted and severe housing recession, as joblessness and falling income are key factors in determining delinquencies on mortgages and foreclosure. By the end of this year about 8.4 million US individuals with mortgages will be unemployed and unable to service their mortgages.
Third, if you plug an unemployment rate of 10 percent to 11 percent into any model of loan defaults, you get ugly figures not just for residential mortgages (both prime and subprime), but also for commercial real estate, credit cards, student loans, auto loans, etc. Thus, banks losses on their toxic assets and their capital needs will be much larger than recently estimated, which will worsen the credit crunch.
Fourth, rising job losses lead to greater demands for protectionist measures, as governments are pressured to save domestic jobs. This threatens to aggravate the damaging contraction of global trade.
Fifth, the higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilizers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable US fiscal path, with budget deficits above 10 percent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse.
This leads to a policy dilemma: Rising unemployment rates are forcing politicians in the US and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment. But, despite persistent deflationary pressure through next year, rising budget deficits, high financial-sector bailout costs, continued monetization of deficits and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation — and thus to higher interest rates, which would stifle the recovery of private demand.
So, while further fiscal stimulus seems necessary to avoid a more protracted recession, governments around the world can ill afford it: they are damned if they do and damned if they don’t. If, like Japan in the late 1990s and the US in 1937, they take the threat of large deficits seriously and raise taxes and cut spending too much too soon, their economies could fall back into recession.
But recession could also result if deficits are allowed to fester, or are increased with additional stimulus to boost jobs and growth, because bond-market vigilantes might push borrowing costs higher.
Thus, even as mounting job losses undermine consumption, housing prices, banks’ balance sheets, support for free trade and public finances, the room for further policy stimulus is becoming narrower. Indeed, not only are governments running out of fiscal bullets as debt surges, but monetary policy is having little short-run traction in economies suffering insolvency — not just liquidity — problems. Worse still, in the medium turn the monetary overhang may lead to significant inflationary risks.
Little wonder, then, that we are now witnessing a significant correction in equity, credit, and commodities markets. The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a sober realization among investors that the global recession will not be over until year end, that the recovery will be weak and well below trend, and that the risks of a double-dip W-shaped recession are rising.
Nouriel Roubini is a professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor.
COPYRIGHT: PROJECT SYNDICATE
A 50-year-old on Wednesday last week died while under anesthesia at a Taipei cosmetic clinic shortly after undergoing a penis enlargement procedure. The surgeon was arrested for suspected medical malpractice, again bringing to the surface shortcomings in the regulation of cosmetic medicine. Media reports said the clinic owner and surgeon, surnamed Ting (丁), was previously convicted of negligent homicide for a postsurgical death and had been charged with coercion and aggravated assault after allegedly stopping a patient from calling for an ambulance. He had also been fined for failing inspections and had allegedly permitted people without medical licenses to assist
It was most annoying last week to read Chairman Xi Jinping’s (習近平) fulsome encomium to the People’s Liberation Army during the Eightieth Anniversary celebrations of victory over Japan in World War II. Comrade Xi’s soaring rhetoric was stuffed with “martyrs, sacrifice, solemnity and unwavering resolve” in praise of the “Chinese People’s War of Resistance Against Japanese Aggression and the World Anti-Fascist War.” His aspirations overflowed with “world peace” and love of the United Nations, of which China is a founding member. The Liberation Army Daily said that every word from General Secretary Xi Jinping “resounded in his powerful voice, illuminating the
The Chinese Communist Party (CCP) will stop at nothing to weaken Taiwan’s sovereignty, going as far as to create complete falsehoods. That the People’s Republic of China (PRC) has never ruled Taiwan is an objective fact. To refute this, Beijing has tried to assert “jurisdiction” over Taiwan, pointing to its military exercises around the nation as “proof.” That is an outright lie: If the PRC had jurisdiction over Taiwan, it could simply have issued decrees. Instead, it needs to perform a show of force around the nation to demonstrate its fantasy. Its actions prove the exact opposite of its assertions. A
An American Institute in Taiwan (AIT) spokesperson on Saturday rebuked a Chinese official for mischaracterizing World War II-era agreements as proving that Taiwan was ceded to China. The US Department of State later affirmed that the AIT remarks reflect Washington’s long-standing position: Taiwan’s political status remains undetermined and should only be resolved peacefully. The US would continue supporting Taiwan against military, economic, legal and diplomatic pressure from China, and opposes any unilateral attempt to alter the “status quo,” particularly through coercion or force, the United Daily News cited the department as saying. The remarks followed Chinese Minister of Foreign Affairs
RSS