If you thought the economy was starting to pick up and perhaps was even off to the races after months of positive GDP growth and much better than expected consumer health, think again. That's according to, Nouriel Roubini, professor of economics at New York University, who says the U.S. economy is destined for another recession in 2012 on account of partisan politics in Washington.
On Monday, after the bipartisan 12-member super committee announced its failure to agree upon $1.2 trillion in cuts over the next 10 years, Roubini, also known as Dr. Doom, tweeted the following: "Super-Committee: Super-Failure, Super-Pathetic, Super-Gridlock, Super-GOP-Lunacy on Taxes, Super-Fiscal Drag in 2012 that ensures double dip."
But his prediction goes beyond the partisan bickering of the committee tasked to cut the country's budget deficits. His point rests upon the inability of ALL Republicans and Democrats in Washington to work together on any economic issue that would benefit the good of the country. He does note that more blame should be laid at the feet of Republicans for their unwillingness to compromise.
Recession Baked Into 2012
Two key laws are set to expire at the end of this year: the payroll tax cut and an extension of unemployment benefits. Both relief measures were supposed to be rolled into the super committee debt deal, but now face imminent expiration due to the "super-failure."
If Congress cannot come together to extend these programs, Roubini, also the chairman of Roubini Global Economics, predicts a "fiscal drag will be $350 billion, 2.3% of GDP," in 2012. Even if elected officials can come to agreement on both issues, the fiscal drag for next year will amount to $200 billion, or 1.3% of GDP, he says.
"If the economy is growing only 1.5%-2% and you get a fiscal drag of 1.3% -- that's the difference between a growth recession and effectively zero growth," he explains.
The other factor to impact the U.S. economy next year is Europe. Without the European sovereign debt crisis, America's 2012 recession would be "mild," says Roubini. But Europe's crisis is more than two-years in the making and getting worse by day. If the situation continues to spread in a disorderly fashion, Roubini expects the shock to global economies and markets to be "worse than the disorderly collapse of Lehman in the fall of 2008."
Stay tuned to parts two and three of this interview.
- Nouriel Roubini