Dr. Doom: Full Recovery Will Take 1-2 Years

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RENEE MONTAGNE, host:

Economist Nouriel Roubini earned the title Dr. Doom for his dire forecast for the economy. That was several years ago and, of course, his predictions were borne out. The New York University professor then shot to fame in the world of economic analysis and he has co-authored a new book. It's called "Crisis Economics." And he joined us from our New York bureau.

Good morning.

Professor NOURIEL ROUBINI (New York University's Stern School of Business): Good morning. A pleasure being with you.

MONTAGNE: Now we had originally planned to focus on the U.S. economy, but with events in Europe unfolding let's begin with that and this massive package, nearly a trillion dollar bailout. Do you think this will work?

Prof. ROUBINI: The financial resources that have been offered over the weekend look like massive, but there are a number of important questions are still open. A number of this country is a very large budget deficits and stocks of public debt. Politically we'll see whether they can reduce spending or increase taxes enough to reduce this deficit levels.

There's a question of whether this fiscal contraction is going to reduce further economic activity. All of these countries have also lost competiveness because for a number of years the wages were growing more than productivity. They'll have to do much more structural reforms to regain competiveness, exporters and so on. So they're plenty of open questions on whether this country is going to be able to avoid the risk default on the public debt.

MONTAGNE: Well, what do you see as the outlook in the near future for the United States?

Prof. ROUBINI: Well, in the U.S. there is a beginning of an economic recovery. But in my view, this recovery is going to anemic, sub-par, below trend for the next couple of years for two reasons: First of all, you have over-leveraged U.S. consumers that over time have to start consuming at the rate slower than their income in order to save more. Secondly, like in Europe right now, we have very large budget deficits in the United States.

If we keep on running deficits of a trillion dollars, over time, we are also going to be in a situation which markets are going to start to worry about the sustainability of the U.S. deficit and public debt. That has not occurred yet, but the chance it might occur are significant. Therefore, over the medium term, the U.S. will have to think about raising revenues and cutting government spending to prevent the kind of crisis we're seeing right now in the euro zone.

MONTAGNE: You just spoke of an anemic recovery, but what does that mean? A year, two years, three years, subject to reversal back into a recession?

So far we are out of the recession so there is a beginning of economic growth. The U.S. potential growth is about three percent. But I do expect that for the next couple of years U.S. economic growth is going to average only about two percent because eventually we'll have to raise taxes and cut government spending. The outcome of many historical financial crises is a retrenchment both by the government, and the private sector and that retrenchment of spending leads to slower economic growth. We're going to start to create jobs starting this year but I expect the unemployment rate is going to remain relatively high for the next couple of years.

MONTAGNE: Since we've been hearing this for a while, that doesn't sound so bad. I mean it would be worse it we were looking at another crisis around the corner.

Prof. ROUBINI: You're right. It's better than having a recession, but unless we tackle our own fiscal deficits, unless we also better supervise banks and other financial institution, we could be planting the seeds of the next financial crisis down the line.

MONTAGNE: Nouriel Roubini is an economics professor at New York University's Stern School of Business. He's the coauthor with Stephen Mihm of the new book "Crisis Economics: A Crash Course in the Future of Finance."

Thanks very much.

Prof. ROUBINI: It was a pleasure being with you today.

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