Hit #2. Research on the unemployment crisis also makes The Globalist Top Ten

The article—The Global Unemployment Crisis: Costs, Causes, Cures  made it in the Globalist Research Center's Top Ten Feautures of 2010. Also, see the full report on the unemployment crisis.

Interview with Joe Stiglitz makes The Globalist's Top Ten Features

Stiglitz predicts a financial crisis in five years. All the more reason to enjoy the moment. Merry X'Mas and a Happy New Year. Back in 2011.

Nobel-worthy

Avinash Dixit, who many consider deserving of the Economics Nobel Prize, was profiled in an IMF publication. See other IMF profiles of famous economists , including one of Nobel Prize-winner Joseph Stiglitz and an interview with him called “The Vindication of Joe Stiglitz”.

China: Property Bubble in the Making?

Ashvin Ahuja, an economist with the IMF, has made a study of property prices in China. Follow the link to compare China's housing market with others around the globe.

Hong Kong



Whether Cyclical or Structural, Unemployment is a Human Tragedy

Is the increase in unemployment cyclical or structural? In an article released today by the IMF, Mai Dao and I summarize some new evidence on this topic. A recovery in output, using monetary and fiscal policy tools, takes too long to lift the boats of the long-term unemployed, and even then does not give them much of a lift. But whether it's cyclical or structural, unemployment takes a severe human toll and merits a decisive policy response, as we discuss in the article. A longer version is available here.

Prakash Loungani and Mai Dao

Gloom & Doom … or Boom? The Movie

Here’s the video from a talk at the IMF at which economists Nouriel Roubini (a.k.a. Dr. Doom) and Mark Zandi were pessimistic about the near-term economic outlook but split on how things might look a couple of years from now. Zandi said we might get 5% growth in the US in 2012.

The Unemployment Crisis: Costs, Causes, Cures

• Is the recent increase in unemployment cyclical or structural?
• Is there is a link between inequality, over-borrowing and financial crises?

My article in The Globalist discusses these issues, among others. The article provides a summary of an October 22 workshop on “The Unemployment Crisis: Costs, Causes, Cures” held at the IMF; the PowerPoint presentations from the workshop are available here. And here's a link to the final version of my IMF Staff Position Note on “The Human Cost of Unemployment: Assessing It, Reducing It” (with Mai Dao). Three links and I’m out. 

Bouncing Between Floors? Globally, House Prices are Up and Down

Real estate markets have been a source of strength during past economic recoveries, but this time is different. Read the story and see the presentation.

Economics Nobel George Akerlof Takes Up Research Position at IMF

If you play a game of word association with an economics Ph.D and say “Akerlof”, chances are the response will be “lemons”. Though best known for his work on the “market for lemons”, Akerlof says the topic that has motivated him the most is unemployment. Read the full story.

More Room to Fall? Prospects for Housing Markets

The IMF just released its world economic outlook, including this update on the generally dismal prospects for real estate markets across the globe.

Real estate markets have been a source of strength during past recoveries, but this time is different. In many major economies around the globe, house prices continue to fall or are only gradually stabilizing. In a few countries, including the United States, there are concerns of a “double dip” in the housing market.

The econometric model that we have used in past analyses suggests that real house prices in advanced economies could fall at an annual rate of between 0.5 percent and 1.5 percent. This is under the assumption that the remaining correction in house prices takes place over the next five years.

The shedding of debt by households could make the macroeconomic impact of this housing bust greater than that of past busts. Households shed debt at a much slower pace than the corporate and financial sectors. This is because the largest portion of household balance sheets on both the asset and the liability side tends to be real estate, which is more difficult to sell off in a fire-sale than bonds and equities. Therefore, the recovery is likely to be slower than in recessions triggered by problems in corporate balance sheets.

For countries such as Spain and Ireland there is an additional reason to expect slow recovery. In these countries, the construction sector grew disproportionately to other sectors of the economy and became the engine of growth in these economies. The housing bust thus brought severe contraction in construction output and employment. The unemployment rate is now three times its 2000–07 average in Ireland and twice its 2000–07 average in Spain, compared with a 20 percent increase on average among euro area countries.

“Double dip” in U.S. housing markets?

In the United States, tax measures temporarily increased housing activity, but demand fell and prices receded after the recent expiration of these incentives. Given the limited success of mortgage modification programs and the shadow inventory from foreclosures and delinquencies, this has renewed fears of a “double dip” in real estate markets.

How large is the shadow inventory? Adding together (i) homes already in foreclosure; (ii) those at risk of foreclosure because they have been in default for 60 days or more; (iii) predicted re-default on modified loans and possible strategic defaults if house prices decline, the shadow inventory of houses for sale may reach 7 million. This is ten times the historical absorption rate of 700,000 units a year overall in the U.S. housing market.

The problem is compounded because, in this recession, U.S. states where the house price bust was more pronounced are also where unemployment has increased the most. This relationship likely reflects the importance of the construction sector in these states’ economies as well as lower labor mobility resulting from problems in the housing sector.

There are other threats. Delinquency rates on commercial mortgage-backed securities have recently reached record highs, and considerable amounts of commercial real estate debt will become due over the next few years. And resets on adjustable-rate loans loom on the horizon.

Rebound in Asia-Pacific?

Several economies in the Asia-Pacific region, Canada, and most Scandinavian countries have experienced a rebound in real estate prices and residential investment since 2009. Will this rebound continue? 

In many of the advanced economies in this group, current price-to-rent and price-to-income ratios are still above historical averages, and econometric estimates still show a deviation of house prices from fundamental values.

For the emerging market economies in this group (namely, China, Hong Kong SAR, and Singapore), fundamentals appear to provide more support for the observed house price increases, mainly due to strong growth prospects. But the econometric estimates are less reliable for these economies than for the advanced economies because data are available for only a fairly short period. More anecdotal evidence—reports of speculative activity, rising vacancy rates in commercial property, sizable mortgage credit growth, and massive capital inflows, especially in China—suggest that these real estate markets may be overheating. In China, deviation of house prices from fundamentals is estimated to be higher in Beijing, Nanjing, Shanghai, and Shenzhen than in other cities.

Some governments in the region have taken measures to tame real estate markets. The Chinese government deployed a range of regulatory tools in the spring of 2010, including increases in transaction taxes and stricter controls on lending.

Summary

In contrast to past recoveries, there appears to be little hope for a sustained upside boost to the overall economy from the real estate sector. In economies where real estate markets are still in decline, the drag on real activity will continue. And in economies where house prices and residential investment are rebounding, concern about bubbles is eliciting policy actions that will temper any short-term boost to economic activity.

Gloom & Doom … or Boom?

In a talk at the IMF, economists Nouriel Roubini (a.k.a. Dr. Doom) and Mark Zandi were pessimistic about the near-term economic outlook but split on how things might look a couple of years from now.

There is a 40 percent chance of a double dip recession in the United States and some other advanced countries, according to Nouriel Roubini, chairman of Roubini Global Economics and a New York University professor. He cautioned against reading too much into recent improvements in economic indicators for Eurozone countries, quipping that “people are getting cheerful, but the best is behind us.” Mark Zandi, chief economist of Moody’s Analytics, matched Roubini in gloom about the near-term outlook, putting the odds of a double dip recession in the United States at 1 in 3.

Both gave credit to governments for policies followed during the Great Recession of 2007-09, in the absence of which they said the outlook would have been much worse. Roubini praised the collective action by G-20 policymakers in easing monetary and fiscal policies, adding that it showed policymakers had learned the lessons from the Great Depression and the Lost Decade in Japan. Zandi said that the U.S. fiscal stimulus “did exactly what it was supposed to do—end the recession.”

Despite these policy successes, though, the problems that precipitated the Great Recession were severe enough that the growth outlook for most advanced countries remains tepid.  Governments are running out of policy options to keep stimulating the economy, Roubini said. And while emerging market economies were in better shape, these economies are not yet powerful enough to act as a locomotive for growth in the advanced countries. Zandi added that the growth expected in the near term is “not going to be enough to forestall increases in unemployment” in advanced economies; he predicted that the U.S. unemployment rate would be back in the double digits over the next few months.  

What could be done to improve the outlook? Roubini and Zandi agreed that a robust recovery would not take place until households, particularly in the U.S., are able to reduce their mortgage debt burdens and establish a more secure financial footing. Roubini said a nationwide write-down of mortgages would be preferable to cumbersome case-by-case loan modifications which would clog up bank offices and bankruptcy courts for years. Banks could be partially compensated for the write-down by warrants that would give them a share of profits from any eventual sale of the homes.

In some countries, it was not just the household sector but governments that needed a debt write-down, Roubini said. While the situation in Greece and other economies was being patched together for the time being with the help of the European Union and the IMF, he worried that in the event of further shocks, "there won't be someone from Mars coming to bail out the IMF or the EU."

Despite sharing Roubini’s gloom over the near term prospects, Zandi held out hope that U.S. prospects would get better by 2012. He pointed to two reasons for hope. First, households are slowly but surely cutting back on debt, and setting the stage for when they will feel comfortable enough to spend again. Second, corporate profits are surging and these have historically been a good predictor of job growth. He predicted that U.S. real GDP growth would be 5% in 2012.

Zandi’s bold prediction carries on a tradition of top economists going out on a limb in their talks at the IMF on the economic outlook. Last week’s talk comes four years after a now-prophetic talk by Nouriel Roubini in which he concluded:

“my view is that the risk of a hard landing is very high for the U.S. economy. I see essentially a recession coming by next year. I give it a very high likelihood. I argue that housing today, like the tech bust in 2000-2001, will have a macro effect; it is not going to be just a sectoral effect. I argue that U.S. consumers are now close to a ‘tipping over’ point given all the vulnerabilities I have discussed. I argue that the Fed easing will occur, so the next move is going to be a cut, but it is not going to prevent a recession. And, finally, I argue that the rest of the world is not going to be able to decouple from the U.S. even if it is not going to experience an outright recession like the United States.  So on that cheerful note, I will stop.”

If U.S. growth in 2012 turns out to be 5%, Zandi will surely be invited back to the IMF to do a victory lap (see his presentation).

Nouriel Roubini signing a copy for Prakash Loungani (Photo: Michael Spilotro/IMF)

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To see the video of the event, click here.

Happy Labor Day: Celebrate Workers, Don't Forget the Unemployed

I was unemployed for a year. It was the most difficult time of my life. I was down to my girlfriend's last dollar. Then, figuring that she was already in graduate school and had no need for them, I started selling off her undergraduate textbooks. Luckily, she had been a double major, so that kept me going for a while. Thirty years later, I can joke about it. But I know that unemployment is no joking matter, and particularly not for the 210 million people across the globe who are unemployed this Labor Day.

Here's a paper I've written on the human cost of unemployment (lost earnings; lower life expectancy; lower earnings and academic achievement for children of the unemployed) and what can be done to get people back to work.

My institution is working with the International Labour Organization to draw attention to the unemployment crisis and to promote discussion of how to cure it. Give us your suggestions at: http://www.osloconference2010.org/

The Return of Dr. Doom

Nouriel Roubini predicted gloom and doom in a now famous but often misreported speech at the IMF on Sept. 7, 2006. Here’s what he really said:

"my view is that the risk of a hard landing is very high for the U.S. economy. I see essentially a recession coming by next year. I give it a very high likelihood. I argue that housing today, like the tech bust in 2000-2001 will have a macro effect; it is not going to be just a sectoral effect. I argue that U.S. consumers are now close to a ‘tipping over’ point given all the vulnerabilities I have discussed. I argue that the Fed easing will occur, so the next move is going to be a cut, but it is not going to prevent a recession. And, finally, I argue that the rest of the world is not going to be able to decouple from the U.S. even if it is not going to experience an outright recession like the United States. So on that cheerful note, I will stop."

Read the full transcript here.

Construction Activity Finally Picks Up

Completion date: September 201?