2 months until next budget crisis?

A prominent economist known as 'Dr. Doom' says the country's budget dispute will come roaring back soon.

By Kim Peterson Jan 3, 2013 1:14PM
Image: Washington, D.C. (Corbis)We have some breathing room after lawmakers made a fiscal cliff deal on New Year's Day. But the country is far from OK. In fact, one well-known economist says another crisis will hit in two months.

Without Congressional action, the country will see $110 billion in spending cuts commence on March 1, writes New York University professor Nouriel Roubini in the Financial Times. And just as those spending cuts hit, the U.S. will hit the debt ceiling. "That is only the beginning," he added.

Known as "Dr. Doom" for his dour views on the economy, Roubini won acclaim for predicting the collapse of the housing market and the 2008 recession. Now, he says that 2013 will be plagued by numerous debates on the budget and the economy. Later this year, talk will turn to medium-turn fiscal consolidation, triggering yet another argument between Republicans and Democrats, he adds.
So expect a big fight about entitlements, and a series of little fights over tax reform: Should the US introduce a value added tax? A flat tax? Higher (or lower) income taxes? A carbon tax? Should we close corporate tax loopholes to raise more revenue? It'll soon get messy.
There's more. Amid all the fierce debates on the horizon, there will be real damage to the economy. Roubini and other economists expect that the combination of tax increases, spending cuts and an increase in payroll taxes will eat into the country's economic growth. Roubini estimates that it will translate into a 1.2% of GDP drag on the economy this year.

If the economy was strongly growing at around 3.5%, then that wouldn't be as much of a problem, he said. But recently, the economy has only grown at about 2%.

"So the U.S. could quite easily come perilously close to stall speed this year -- or worse, if the eurozone crisis worsens," he added.

So who's right on this issue, Republicans or Democrats? No one, says Roubini. Even typical Republican voters don't want to gut the welfare state, and "Tea Party extremists are more noise than signal."

He says that maintaining a basic welfare state "is right and necessary" in our age of globalization, rapid technological change and demographic pressure. But doing so means higher taxes for the middle class along with the rich.
It will probably take years for the U.S. to confront the reality of its fiscal position and raise revenues to a level sufficient to fund a reformed -- but not gutted -- welfare state. Large fiscal deficits will remain the norm for the next few years, at least so long as the bond market remains quiet, as I believe it will.

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154Comments
Jan 3, 2013 2:42PM
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Warren Buffett is real optimistic.That means a lot more than Dr.Doom.
Jan 3, 2013 2:36PM
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Roubini has keen insight into the obvious.
Jan 3, 2013 2:33PM
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"A basic welfare state is 'right and necessary'"?  Define basic welfare state.  As of now, a single mother with 2 kids can get almost $600/month in food stamp benefits if she qualifies.  Is $600/month for 1 adult and 2 children "basic welfare"?  Of course this doesn't include all the free lunches at school.  Doesn't Sheriff Joe out in Arizona feed his prisoners on something like $1/day?  What about the free Obama-phone with 250 minutes a month - is that a "basic" need?  What about the 3 bedroom, 1200 square foot Section 8 apartment - is that a "basic" need.

We've gone way past "basic welfare state" when we have people on the dole who don't have to share a bedroom, or who get to eat steak and ribs and shrimp and weigh 400 pounds.  Having a car and a big screen TV and a gaming system and a blue ray player and an i-Pod and a closet full of clothes and a 2-pack a day habit is a bit more than "basic welfare".

The Salvation Army provides "basic welfare".  The United Way and Red Cross and churches and food pantries provide "basic welfare".  The gov has gone way past "basic welfare", to the point that people are lining up to get as much as they can so they can keep doing nothing for as long as they can.  This is unacceptable and unsustainable.

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ROFL

 

things are going to get very interesting very soon folks

 

 

Jan 3, 2013 2:24PM
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Did Roubnii forecast Christmas? Wow, what a visionary!!!!
Jan 3, 2013 2:22PM
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"Let the cut take place. Stop the out of control spending. Cut the budgets of congress and the President now."

 

Obama just had to sign a $630 BILLION military budget without the ability to eliminate anything. Had to. That's about $1.75 BILLION spent daily on the war machine. $1.75 BILLION spent daily here on our own soil would shift us from fossil fuels to self-sufficient alternatives and create millions of long-term jobs and careers. Remember... only Republicans actually benefit from the war machine. They would be the same folks that said NO, created the Fiscal Cliff drama and control Wall Street.

 

Let's do away with the GOP and see if we can't work together to recover America.

Jan 3, 2013 2:20PM
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Most everybody not on the dole knows that disaster is coming head on. 
Jan 3, 2013 2:16PM
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Dr. Doom? I concur with Roubini but overall he is sugar-coating the year.

 

Every twenty-something who's dad isn't a financier or isn't selling drugs is pretty upset with the lack of progress. Sales jobs suck from a lack of pay and unrealistic goal sets. All management needs to crawl back under the rocks they came from. Utterly useless overpaid people. Cars sales are not going to go up but gas prices will and more people will succumb to the cost of wage-earner jobs. We know now that the stock markets are stalemated by a few mega-players who assimilate everything and lose it in the Black Hole Financial Sector. Congress? WHAT Congress? A small group of useless bickerers making more than nearly tax-payer, doing nothing good for America. Good people are walking away from the home they put everything into and disappearing, not relocating. You can't recover... it's not possible in this environment, so more and more will stop trying. Too many guns in the hands of nut cases, too little cash in the hands of innovators and entrepreneurs. Permanent and irrevokable damage is being done. The ME Generation is taking America down with it. A decision is straight ahead... do we sacrifice all future generations for this one useless one, or push them off our soil and starting tilling that for basic survival?

 

Close the banks. End the Fed. Get RID of Wall Street. It was only ever about job recovery. 2008 was FOUR WHOLE YEARS ago. Don't blame the President, blame the financier and his puppet in Congress.

Jan 3, 2013 2:12PM
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I project that we have one fiscal quarter of growth in the stock market on the order of 7%.  So set your limit orders on stocks at risk in a no growth market and be prepared to get out before the ides of March.  
Jan 3, 2013 2:08PM
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Let the cut take place. Stop the out of control spending. Cut the budgets of congress and the President now.
Jan 3, 2013 2:06PM
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Now Now Dr. Doom........... I will send Foxy Az Blond over right away with a copy of "The Secret". That and a glass of koolaid will have you "right as rain".
Jan 3, 2013 2:00PM
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Wrong...  Republicans WANT to gut  the "Welfare State" to something we can afford.

This means we are for as much Welfare as we take in. in taxes.  NOT ONE DIME MORE.

There will always be a  leech class sponging off those that work for a living.  i.e. democrats.
Just like there will always be criminals...  more democrats.

Those that would use the government to seize the paychecks of those that work will always be with us.  Republicans just insist that they pay their fair and equal share, and that we stop mortgaging our children's future to fund today's leech class.
Jan 3, 2013 1:50PM
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If you are investing with a less than 5 year time frame, you would have to be an idiot to buy now.
Jan 3, 2013 1:49PM
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I expect at least a 10% market pull back by June.
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