Economist Shiller Sees Potential for 'Double Dip' Recession

The Wall Street Journal

With the U.S. economic recovery losing steam, the chances of a second phase of a slowdown are increasing, according to a leading economist.

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Speaking in The Wall Street Journal's The Big Interview show, Robert Shiller, professor of economics at Yale University, said he thought the second dip down of a so-called double-dip recession "may be imminent."

Earlier this month, he told the Wall Street Journal he thought the chance of a double-dip recession, which he noted is a rare event, was greater than 50%.

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Mr. Shiller now suspects that when the National Bureau of Economic Research eventually looks back at the data, the third quarter of 2010 might mark the beginning of the second dip of the recession.

In another indication of a faltering economy, the government estimate of second-quarter growth in gross domestic product was revised downward Friday.

Mr. Shiller also said he thinks the U.S. economy is "teetering on the brink of deflation." Deflation occurs when the general level of consumer prices falls, as was the case in the Great Depression. He said the U.S. is ill-prepared for such an event because of the lack of "indexing" in contracts.

Deflation is generally considered to be a worse problem for an economy than moderate inflation. The Federal Reserve has been adopting measures to add liquidity into the economy and stave off the danger of deflation.

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In addition, the co-creator of the Case-Shiller Home Price Index said he is worried that housing prices could decline for another five years. He noted that Japan saw land prices decline for 15 consecutive years up to 2006. Data released earlier this week show the housing sector is performing at the worst level in decades.

Mr. Shiller said the biggest problem for the economy and the national psyche currently is unemployment, and he called on the federal government and local government to create jobs. Specifically, he suggested that schools employ an additional person in each class room as a teacher's aid. Not only would it employ millions, he said, but it would be good for the children. He said students would enjoy the extra attention of another person.

When asked about how to stimulate the private sector to create jobs, he noted that there was such uncertainty in the economy currently that businesses were backing off from making hiring decisions. At least part of that uncertainty is being caused by the lack of clarity over what part, if any, of the Bush-era tax cuts would be extended in 2011.

Mr. Shiller is also known as an expert on bubbles, having studied the technology-stock boom and bust, as well as the housing disaster. He said he doesn't think the bond market is in a bubble.

Write to Simon Constable at simon.constable@dowjones.com

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