Red Meat: Liberal economist says we’re “Teetering on the brink of deflation.”

 

Liberal Yale Economist Shiller Sees Potential for 'Double Dip' Recession

I’ve never been much of a doom-and-gloomer.  I’m an economist, but I’m also a conservative, and like other conservatives I tend to trust the power of the American consumer and the American system of free enterprise to keep recessions, short, shallow and relatively painless. 

But with people much smarter than me sounding the alarm, it’s hard to maintain the rosy outlook.  Shiller spoke with WSJ’s The Big Interview Show, and had these grim statements to share:

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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.

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.

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He says unemployment is a drag on morale, and that government should be all about ‘job creation.’  It’s worth noting that Shiller is a dyed in the wool demand-side Keynesian.  Watching him nearly choke on the question of tax cuts (around the 6:30 mark in the embedded video) to stimulate business investment and hiring was amusing enough, but his recommendation for hiring millions of “teachers’ aides” is pure comedy gold.

His “teetering on the brink” warning is an indictment of the Obama regime’s tactics of employing a 1930’s era economic policy.  But his belief isn’t that they didn’t go too far.  It’s that they haven’t done enough.

Gimme some feedback in the comments.