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Roubini: Two U.S. Economies Diverging

Posted by: John Tozzi on November 18, 2009

Nouriel Roubini, the NYU economist who accurately predicted the financial meltdown, writes an important commentary in The Globe and Mail about two disparate American economies: “There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn,” he says.

Still mired in the recession are small firms and the millions of unemployed and underemployed. Incomplete or lagging data, he suggests, distorts the perception of how well the economy is doing:

And, while data from firms suggest that job losses in the past three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest a number above two million.

He also echoes Fed Chairman Ben Bernanke’s analysis that credit is restored for corporations with access to capital markets but not for others:

And the credit crunch for non-investment-grade firms and smaller firms, which rely mostly on access to bank loans rather than capital markets, is still severe.

Or consider bankruptcies and defaults by households and firms. Larger firms – even those with large debt problems – can refinance their excessive liabilities in or out of court, but an unprecedented number of small businesses are going bankrupt. The same holds for households, with millions of weaker and poorer borrowers defaulting on mortgages, credit cards, auto loans, student loans and other consumer credit.

Consider also what is happening to private consumption and retail sales. Recent monthly figures suggest a rise in retail sales. But, because the official statistics capture mostly sales by larger retailers and exclude the fall by hundreds of thousands of smaller stores and businesses that have failed, consumption looks better than it really is.

While we likely have to wait for more data, there seems to be an emerging theme that the economy most small firms inhabit is diverging from the economy that firms with access to stock and bond markets inhabit. Roubini’s essay expands on an idea advanced last week by Goldman Sachs economist Jan Hatzius that found small business sentiment (as measured by the NFIB’s index) out of line with other measures of the economy, like GDP.

In our post about Hatzius’s report, we asked readers who have weathered other recessions whether this recovery feels different. One, Jeff Goldberg, left this comment:

My experience is we had credit available in the early 1990’s. This time it has all but dried up. With no credit it is difficult to wiggle. We therefore have laid off 2 people and are hoping for some type of holiday season to pull us through.

Read Roubini’s full piece here. And let us know where it feels like your business operates — in the economy that’s recovering, or the one that isn’t.

Reader Comments

Hugo van Randwyck

November 18, 2009 8:54 PM

Good article. America needs to expand well run banks - not reward irresponsible banks. Well run banks could be helped with a tax holiday, or even tax rebates, so they can expand sensible lending. I'm not sure Washington politicians realise what could happen if there is a double-dip recession. Policies need to help good businesses and increase disposable income, so creating jobs.

Hugh McCann

November 19, 2009 6:29 AM

Finally someone gets it. In my view, the government is trying to help out small business but does not have a clue how to do it. We require a different approach. My guess is we will experience chronic unemployment for many, many years. The world has changed and we need to adjust to the new reality. Tax people not businesses.

Milonja Bjelic

November 19, 2009 11:19 AM

You have millions of people working in financial industry and only an extremely small percentage of these people saw what is coming at the end of 2008. It tells me that a large majority of these people do not think with their own heads - they just follow popular opinions. Roubini is different, brave, independent, but it does not mean he will be right in each and every of his opinions in the future. There are others who dare to confront popular opinions. One example is Andy Xie.


November 19, 2009 12:01 PM

Great article! This is the crux of the current crisis in my view. I have been a community banker since I finished college in 2004, which means I've worked for banks that do not have access to capital markets the same way that the top 19 banks do. For the most part, small businesses like the ones that Roubini is referring to get their financing from smaller banks like the ones that I have worked for. In other words, small banks and small businesses on the same sinking ship with no lifeboats. All of my clients fit Roubini's description of a small business (no access to capital markets), and all of them are on the brink of bankruptcy if they have not already filed bankruptcy. When enough of those clients default, the banks that serve them fail, which is why there are so many small bank failures occuring right now. However, the solution to their problem is not credit. Providing new debt to sectors of the economy that are flailing because of excessive debt is like throwing gasoline on a forest fire. The only way out of the recession for small businesses is an increase in demand for their products and services that will put them back to work. The most valuable commodity now is time; if demand doesn't pick up soon enough to prevent all of the small businesses from defaulting on their loans then all of the small banks will eventually burn through all of their equity capital. In the end, we will be left with only the big banks and big businesses that artificially drove down the price of risk with complex instruments (that hide the costs of default) to cause the crisis in the first place.


November 19, 2009 12:23 PM

The elephant in the room that no one dare speak of is that economic growth is bumping up against more and more limits. Energy is the bottleneck now, and oil in particular will serve as a sort of "governor" that kicks in to throttle growth in future years. Watch what happens in coming years: when economic growth starts to increase, demand for finite oil will kick energy costs to sharp highs and that will in turn choke off the growth, just like an RPM-monitoring governor on a car engine. We've been able to rely on quantitative growth of the economy since about 1600 to solve all problems, but that era is drawing to a close. Now, we need to look to qualitative economic development, as per Steady State Economy theory. It'll take a while for this to sink in, but watch how resource limits choke off growth cycles in coming years.

Mike Vitamvs

November 19, 2009 12:57 PM

As a small business owner Roubini is dead on. We've been in business 23 years and have employed as many as 100 people. Our access to capital has dried up and it is causing us not look at growth but look at what we can do to survive.


November 19, 2009 1:05 PM

A previous poster stated "Tax people not businesses.".

It is not possible to tax a business. All a business can do is collect taxes from individuals and then give that money to the government. Corporate taxes are nothing more that hidden taxes on individual prople.

DeeDee Santos

November 19, 2009 1:06 PM

Many community banks have taken themselves out of their community's main street recovery by refusing to lend to good viable businesses. With little to no lending available for businesses to balance cash flow, serious cuts are being made within our businesses, and many are failing. Without balanced cashflow, some companies simply cannot meet the demands of their customers and are left behind in economic recovery. Jobs are lost. And the implication is devastating in communities because jobs mean people can pay their mortgage, car loan and credit cards. Banks are only propetuating the problem for themselves in the end.

Nick P

November 19, 2009 1:08 PM

The business clueless Obama administration remains enemy #1 of small business. We have put off all expansion plans. Our priorities at this time are the next 2 elections. No reason to work harder so Obama and his lap dogs can steal it.


November 19, 2009 1:56 PM



November 19, 2009 2:05 PM

Hugh McCann, There is a major problem with the final sentence of your comment: "Tax people not businesses."

People don't have any money anymore. They don't have jobs, they don't have healthcare, and they certainly don't have the wherewithal to take on larger tax burdens to subsidize business profits anymore. Furthermore, over the past 30-years, we've followed that route to our ruin.

Tax policy in the US already taxes individuals and uses the proceeds to subsidize business profits or "growth" and what has it got us? Amazing amounts of government debt (when you incent a company to move to your town or state by offering them tax breaks they don't need, the break goes to their bottom line but increases the public debt which means less money for schools etc.).

These "deals" are essentially nothing more than blackmail. "If you don't give us a tax break, we'll leave town." These kinds of activities should be illegal at best.

Businesses benefit everyday from government activity and, therefore, are obligated to contribute to paying for those benfits - like everyone else. Businesses benefit from the educational system by getting skilled workers in return. They benefit from police and fire protection that insures that their property is safe. They benefit from the government providing roads and highways so that they can deliver their goods to markets. They benefit from government bailouts. They benefit from all of these things as do individuals - they need to pay their share of the bill.

If I get a pay-cut or lose my job and ask the state or my landlord for a break on taxes or rent they'll laugh me out-the-door. Why should businesses be any different? If companies can't manage to pay their fair share of taxes for the services they benefit from, they deserve to go out-of-business for poor management of their finances like everyone else. In economics, this is referred to as a "free-market" approach.

It's time to wake-up and jettison the short-sighted supply-side policies that don't work for the benefit of the country. Socialism for the Rich at the expense of everyone else is bad public policy and will leave the US a third-world mess of a country in my lifetime if we don't turn it around.

I'm sorry, but I have to respectfully disagree with you. These issues are not right-left, they're up-down. We, as a country, need to put aside the distractions and go back to work.

James Caudle

November 19, 2009 2:05 PM

Regarding the above post, stating that "it is not possible to tax a business..." That's incorrect.

Businesses are taxed in many ways, just like individuals are. Businesses pay taxes on their profits, just as individuals pay income tax. Businesses also pay property taxes, and businesses also pay taxes in the form of operating licenses, required worker's comp insurance, etc. Furthermore, businesses must match the Social Security and Medicare taxes paid by their employees, as well as pay both a federal and state unemployment tax to support the unemployed.

Yes, businesses are indeed taxed... much more so than individuals are. In many ways, the current tax system is very hostile toward business, and impedes economic growth and development.

As far as the opinion that businesses only collect taxes from individuals and pass that money to the govt, consider this - there are many, many businesses out there that don't sell anything to individuals... only to other businesses.


November 19, 2009 3:04 PM

Roubini is right! May be need Houdini to do the magic for small businesses to re-emerge strongly and quickly!!

It is a fact that small businesses - many of them in the tech./manufacturing sector - are still hurting. Clearly, there are many clogs in the pipelines that feed the small businesses.

Some other reasonss for the divergence include things such as - funds being diverted elsewhere. For example, a disproportionately large share of the stimulus funds (ARA) for hi-tech small businesses are ending up at research centers or universities when in fact they are intended for job-creating and wealth-producing small businesses.

Whatever the actual phenomenon may be, to a large extent what ails small businesses today could very well be perpetrated or aggravated by those who wish to divide our country or diminish its world stature.


November 19, 2009 3:26 PM

Roubini is spot on. And for those that yearn for the days of irresponsible mega-deficit fiscal policy from the Reagan Revolution - Bush era, that sent the National Debt from just $1.00 Trillion in 1981 (9/31/1981), after 205 yrs as a nation & 39 presidents, on a 18x Reagan Revolution skyrocket trajectory a mere 28 yrs later, to today's $12 Trillion debt principle + another $6 Trillion in Net Interest paid-out = $18 TRILLION P&I National Debt run-up, 18x in just 28 years, with the Net Interest to carry that National Debt burden from Hell (a crumbling empire)... it is precisely that fiscal handcuff and straight-jacket today that makes stimulus pump-priming a deadly double-edged sword: Can America afford to further deficit spend, on the scale it needs, when it so desperately needs massive pump-priming at this critical juncture?

There is a reason why the dollar is plunging in value. Reagan & Bush's reckless fiscal policies (Reaganomics in a nutshell) have practically bankrupted America's ability for rainy-day spending. And anybody with a brain could see where our unsustainable fiscal policies were taking us.

If Clinton's departing gift to America, "Surpluses as far as the eye's could see", (one of the greatest legacy gifts of the century -- squandered) hadn't been 180 degrees reversed by Bush and the republican takeover of government, America could have EASILY fiscally spent itself out of this Economic Meltdown Bush left behind as his own personal "gift to America" and legacy.

We're in a world of hurt because we as a nation have ill-equipped ourselves for severe rainy-days, "blow-back" policies, and economic meltdowns... brought about by Anything-Goes-Deregulation, free-market greed & exploitation legislated by Washington, and suicidal deficit-spending for a generation and a half.

$18 TRILLION national debt P&I later: wake up America and pay your party bill. Electing Republicans because you like "free lunches" and Charge-it & Forget-it Conservatives and the credit-card parties they throw for you... do have compounding prices to pay, eventually. Well America, pay up for a generation and a half of irresponsible idiocy at the voting booth. All while our nation's watchdogs, OUR journalists, slept on the job.

Dick Cheney: "Reagan proved deficits don't matter." Idiocy exponentialized ... and gobbled up by the gullibles. We do deserve this, no?


November 19, 2009 4:17 PM

Why should the whole of America pay the price for the collosal debt? The more responsible voters (middle-class and small business entreprenuers) shouldn't be paying the big price of today. Lets penalize the wealth-squanderers and debt party-poopers.


November 19, 2009 4:39 PM

KEN where have you been and are you a socialistic Idealist. Jimmy Carter and Bill Clinton are the ones who set up the Fanny Mae and Freddy Mac give aways which George Bush had to deal with as it was law. By the way to totally blame any president even the present one is to be ignorant of how constitutional government works. Its Congress and the Senate who make law, all the president can do is veto or sign it into law.As I remember it was during Carters administration that this nation went through one of the worst recessions since the great depression and it was during Ronald Reagans term that we managed to get back on our feet. When Bill Clinton went in office the economy was in pretty good shape so how could he do any good.


November 19, 2009 8:58 PM

JERRY, Presidents submit, sign, and execute the Federal budgets... or they can VETO it. They also Bully Pulpit its priorities. It's called national leadership. No denying the Reagan Revolution. We are paying its price today, and for generations to come.

1981 = $1.00 Trillion National Debt, after 205 yrs as a nation and 39 presidents.

2009 = An 18x run up, a mere 28 yrs later, in that runaway burden due to The Reagan Revolution's Reaganomics.

Reaganomics was thee most tragic REVOLUTION in American history, via its explosion of the out of control compounding National Debt, YET to fully play out. Far from it. As it may spell our Great Decline. Obama will be lucky to reverse it, as it may already be too late to reverse America's "unaffordability crisis" and decline of empire. Read Niall Ferguson's: "Colossus: The Rise & Fall of the American Empire" on Amazon.

JERRY, I suppose you blame Tip O'Neil's House Dems for the 18x run-up in the National Debt since 1981, when it was just $1.00 Trillion? Please. Reagan pulled a Republican Senate, led by Howard Baker, into power with him in 1980 too, as you probably don't recall. Read Atlantic Monthly's Dec. 1981: "The Education of David Stockman" for an 18,500 word refresher on The Reagan Revolution. Google it.

The Republicans have only had 3 yrs where they were "Powerless" and couldn't "Veto" a reversal of Reaganomics, either via control of the White House or Congress: Clinton's first two 'training wheel' years, in 93 & 94, where Clinton engaged in "fiscal discipline" and raised taxes structurally enough so that by the end of his 2nd term Clinton generated "Surpluses as far as the eyes could see", as his legacy and gift to America, (reversed 180 degrees by Bush) and this year in 2009, with the Dems back in control of fiscal direction. Clinton also vetoed dozens and dozens of Republican tax cut legislation bills after 1994 as well, thank god.

Obama has yet to sign & execute even his first federal budget.

Listen to the Tea Party Republicans of today yearn with all their uneducated might for the suicidal fiscal policies of their heroes, Reagan & Bush. Reagan had stealthily kicked off and initiated The Great Decline of the American Empire via Reaganomics, pure & simple. Just took a mere 27 yrs for The Great Meltdown to materialize. Reaganomics is still in effect today, as congress & Obama have yet to pass financial/economic/tax reforms.

Face it: Deficits and an out of control National Debt NEED to be paid for; even irresponsible, nation killing republicans and conservatives should realize that. It's tragically hilarious how conservatives have "suddenly" found their "fiscal conservative" roots after being AWOL for 28 years, while they worshiped Reagan & Bush. Can you say "Hypocritical"?

Jimmy Carter's years were relatively GOOD!, save the last. He was handicapped by run-away structural inflation Nixion's "priming the pump" re-election efforts generated in 1972, followed by an unsuccessful Nixion "price freeze". The Fed at that point in history was without skill-sets & policies to deal with inflation. Thus the Great Inflation -- that had a by-product silver lining: driving UP the value of mom & dad's home, and the family's net worth in the process, and drove DOWN the actual inflation-adjusted cost of their low fixed rate mortgages. Bada-Bing! It was the Lending Class that was the real victim of inflation. Their boom would come in the 80's, thanks to Paul Volcker.

Jimmy Carter is an unsung hero in America via his rarely mentioned Aug 1979 appointment of Paul Volcker to the Fed. Volcker's Fed implemented a global SEA CHANGE policy shift in Oct 1979 with its switch from Keynesian to Monetarism monetary policy, that would solely be responsible for 2/3rd's of the "Misery Index" (high interest rates, high unemployment... and high inflation) that Reagan stuck Carter with when the Fed implemented an all out WAR against inflation that Oct in 1979 and steadily drove interest rates to 21% to their peak in Jan 1981, day's before Reagan's inauguration. Volcker paved the way for the economic good times of the 80's, 90's, and 00's... while the Reaganomics fiscal cancer quietly metastasized in the nation's gut.

Paul Volcker's Fed killed Jimmy Carter's reelection hopes with it via its Misery Index inducing monetary policy and laid 80% of the ground-work for 80's Great Bull Market, which commenced in Aug 1982, when the financial markets finally realized their Kryptonite, Achilles' Heel, Demon, and nightmare -- INFLATION -- had been whipped by Paul Volcker's Fed.

Reagan's reckless credit-card military spending and 'free lunch' deficit fiscal policy provided the remaining spike to the punch bowl, To Be Paid with compounding interest and a runaway National indebtedness, at a future date.

Uneducated no-nothings somehow associate the whipping of inflation and run up in the stock markets to Reagan somehow, cuz that's simply what they want to believe, having no use or desire for facts, actual history, or reality. The Politics of The Believers!

Volcker's Fed drove up the "Misery Index" in 1980, 81, & 82; brought about the Great Recession of 1982; and also drove down the "Misery Index" by lowering interest rates, killing inflation, and setting off employment booms via the Great Bull Run. Sing the praises of Paul Volcker if you worship the 80's run up in the financial markets. Then thank Jimmy Carter for Paul Volcker's appointment and ignoring advisor's advise Volcker "won't be a team player".

Reagan is what's killing us today... from his grave he rules.


November 20, 2009 12:54 AM

Inflation is just a tax on lenders and subvention for borrowers.
Who are lenders?
Those who get paid constant revenue and take limited risk.
For example, bank savers, bondholders, and labors who paid wages...etc..
Who are borrowers?
Those who get paid variable revenue and take infinite risk.
For example, banks(with respect to bank savers), bonds issuers, and your boss(borrowing your time and skill and paying u wages as 'interest')...etc..
IF NO inflation, the expected value of the game between borrowers and lenders is fair.
However it's not. To be a borrower is encouraged and lenders are punished.

Among lenders, revenues and risks are low, and most of people would get positive revenue.
Instead, among borrowers, revenues and risks are high, and only few ones can win the lottery.

Notice, the so called wealth people have no(precisely, few percentage) 'money' but stocks, real estate, and 'debt'.

Many people believe that only the poor would bear debt.
But don't forget, all debt needs securities, like real estate or stocks. The credit of poor people is also poor.

Hence, the biggest debtors are:
1. governments.
2. banks.
3. companies.

The governments not only issue huge amount of bonds but also are the excluded currency issuer. besides, currency can be regarded as a type of bonds.

When we deposit money into a bank, we are lenders, the bank is borrower. We can imagine how much debt the banks bear.

Finally, the companies have much credit than normal people is not too hard to realized.

Steve Reynolds

November 20, 2009 1:14 PM

Ditto on the "gets it." Banks began reducing or cancelling credit lines to small business a year ago, and no signs of change. Most still don't want to issue LOC if real estate, such as owner's home, is used to secure it because of the changing real estate market. Didn't see that in 1980's or 1990's. Until some form of financial stability is available to small businesses, our desire to hire and expand will remain limited. One deep repercussion is that most small businesses like purchasing from other small or local businesses when possible, thus multiplying the effect of the credit crunch in our sector.
The banks don't have anyone still employed who knows how to judge risk in this economy, so they just avoid it altogether.
Here in Nevada, article in a business paper noted that renewable energy resources here are potentially huge, but requires Asian investment to develop. Sad to think we can't support our own opportunities anymore.

Hugh McCann

November 24, 2009 11:12 PM

Before you comment please read carefully all content at
I only wish we could discuss these proposals face to face. We require a National Industrial Sector Policy. A secure job IS the best social policy. Create an investment climate and unleash the productive economy. Making something is very important to sustaining our standard of living. Not everyone can be a Hedge Fund Manager and low end service jobs do not pay enough to support most families. Manufacturing is a wealth multiplier. Our cities are polluted, urban schools are decaying and business profits are being confiscated at the margin at too high a rate. The return on risk is, well, too risky. I actually own a manufacturing business, employ wonderful people and risk my own capital. I am for Smarter Tax Policy! Create more tax brackets and tax people but do not confiscate the working capital (earned income) of entrepreneurs and risk takers. Create tax policies that induce business owners to grow their market share and be more competitive, globally. Our economic potential is in exporting value added products and services! Use the Tarp money to reclaim the urban brownfields and make the land shovel ready. Clean it up and apply Smarter Tax Policy and they will come!

David H. Sussman

November 25, 2009 3:31 PM

It's simple really... provide incentives to the banks to lend to small business. THEN you will see a true recovery. Anything else is just a shell game.

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