The Biden administration branding its policies as Bidenomics, a play on Reaganomics, to try to tout its economic accomplishments, but the messages have struggled to resonate with voters. As the country gets ready for the 2024 election season, NYU Stern School of Business Professor Emeritus Nouriel Roubini joins Yahoo Finance Senior Columnist Rick Newman to break down Biden's economic policies, what the economy will look like heading into election season, and how it will affect the 2024 presidential election.
Roubini explained that looking at consumer confidence data could be a key indicator for President Biden's chances next year. "It depends within the next 12 months we have a soft landing and if growth has potential, and if inflation falls further, if real wages are increasing, then I think the consumer, then I think the consumer confidence will be increasing over time."
I think there are probably several factors that explain that disconnect. Factor number one was that inflation was quite high until recently. And it eroded real wages. And wages were growing less than inflation. Therefore, there was a significant fall in the last year and a half in real wages. They're now going up again because wage growth is robust, and inflation is falling. But for a while, inflation was rising. And people look at their pocket books, and they see that food is more expensive. Energy is more expensive. A whole bunch of other services are more expensive. And that's part of the problem.
Secondly, there is economic insecurity about the future. Clearly, the economy is doing well right now. But there is a worry that eventually, we may get into a recession. There is income and wealth inequality, and economic activity might slow down as opposed to picking up. Three, even if inflation is low right now, say 3%, the price level at which you're buying say food, or energy, or the services is higher. And the only way you could have a situation in which prices are lower, the way they were before, for example, COVID, would be if you had a recession. And that recession would lead to a deflation. But that's not the way you want to get lower prices.
So at some point, when inflation occurs, even inflation is falling, the level of price is higher. So real income might be squeezed. And that's something that cannot be resolved. Something we have to accept. So there's a variety of different factors that explain this kind of economic malaise in the polls.
RICK NEWMAN: So we're not going to ask you to be a political prognosticator, but you are an economic prognosticator. What do you think is going to happen in the economy during the next 12 months leading up to election day, which is basically a year from now?
NOURIEL ROUBINI: Well, there are three scenarios about the economy. One right now looks like highly unlikely, a real hard landing, severe recession, and a financial crisis. Six months ago with the banking problem, that was a risk a year ago with rising inflation, commodity prices. That was a risk. That tail risk is lower. So the question is whether the economy is going to have a soft landing where you go back to 2% inflation without any recession, or whether it's going to be a softish, bumpy landing where in order to achieve 2% inflation, you're going to have a short and shallow recession.
I would say that the jury is still out on that. The economic data actually right now look like in the direction of soft landing. Growth is still above potential. Inflation has been falling. And therefore, we're going in the right direction. But interest rates are higher, higher for longer. That may slow down the economy. There are geopolitical risks that might lead to a spike in energy prices. And therefore, there are factors that could lead us to a short and shallow recession. Now from a political point of view, even a short shallow recession would be very damaging for Biden because if there was a recession during an election year, of course, his popularity will further decrease.
RICK NEWMAN: So political polling is one thing, which is not an economic indicator. But consumer confidence surveys are an economic indicator. And many of them are terrible. I mean, they are recessionary. I mean, people's attitudes are similar to what they are like during a recession. Do you see no way in which people are going to feel better about the economy during the next 12 months?
NOURIEL ROUBINI: Well, it depends if in the next 12 months, we have a soft landing, if growth stays above potential, if inflation falls further, if real wages are increasing. Then I think the consumer confidence is going to be increasing over time. The consumers, by the way, have still a buffer of about $1 trillion of savings. 5% of their disposable income they can use in case there is a slowdown in the economy. And that's one of the reasons why the economy is stronger than otherwise.
We have the CHIPS Act. We have the Infrastructure Act. We have the IRA. Those are going to be fiscal boosts to the economy and to real incomes. So as long as the economy is going to do well and avoid a recession, I think consumer confidence is going to likely improve over time.
RICK NEWMAN: I mean, you think it'll improve over 12 months, enough to move the needle in the presidential election?
NOURIEL ROUBINI: Let's put it this way. Sentiment matters, but people look also at what's happening. If there is a soft landing, if economic growth is above potential, if job creation is still robust, if inflation is lower, if unemployment is low, I think at some point, people are going to realize that their economic conditions are better than their foul mood.
And some of that foul mood is also partisan. If you look at these polls, most Republicans, regardless of the economic conditions, think the economy is poor. Most Democrats think otherwise. So there's also a bit of a partisanship element. There's a bit of a bias in these polls.
RICK NEWMAN: So you mentioned some of that big legislation Biden has signed there was the Infrastructure Act in 2021, the so-called Inflation Reduction Act in '22, which had really nothing to do with inflation. That was about green energy mostly. The Semiconductors Act also in 2022. Some of this is this is not business as usual. This is a more robust government role in the economy. What are your thoughts on how this is affecting the economy, and is it going to do anything about income inequality, which you just mentioned?
NOURIEL ROUBINI: Well, I would say that there was an economic doctrine of neoliberal policies that was actually bipartisan when George W. Bush was President, when Clinton was President, when Obama President. That was the view.
RICK NEWMAN: And that was more globalist, engaging in China.
NOURIEL ROUBINI: Yeah. Free trading with China, open up free migration, small budget deficits, deregulation, and so on. For many reasons, this has led to income and wealth inequality and economic malaise. So it's out of the window. It was out of the window even before Biden came to power. If you think about Trump, his policies were completely different from traditional GOP that used to be in favor of big business, big tech, Wall Street, and you name it.
So that movement towards more neopopulist policies, protectionism, and more government intervention in the economy, more subsidies to the private sector, more regulation, bashing big business started under Donald Trump. The problem with Donald Trump was the he ran as a populist, and then he governed as a plutocrat. Tax Act for the rich, bashing labors, and so on. While Biden has become a true neopopulist. And his economic policies, whether it is on trade, whether it is derisking, whether it is controlling China, whether it is restricting migration, whether it's stimulating the economy with infrastructure, reshoring of manufacturing, friendshoring, and so on, go in the direction of rebuilding the economic and job base of the United States.
So in some sense, conceptually, Trump and Biden are close to each other, but one pretended to be a populist, while one is a truly an economic populist.
RICK NEWMAN: So what is the outcome going to be of what Biden is doing with the economy? First of all, is it does it stand to think that this will last even if we have a change of administration because as you know, administrations flip-flop on policies? Is this sort of neopopulism here to stay? And is it going to address income inequality and many of the problems that Donald Trump actually put his finger on in 2016?
NOURIEL ROUBINI: Well, I think that regardless of whether Biden wins or Trump, policies that are of derisking, of protectionism, of deglobalization, of decoupling on one side, restricting migration. A greater role of subsidies to favorite sectors that are strategically important, whether it is semiconductors or others are going to remain.
Of course, the policy of Biden and Trump on climate change are very different. Biden has passed the IRA Act. But that IRA react is actually very popular in red states that are investing massive amounts of money into all this renewable energy. So it's going to stay. Those subsidies are going to be there regardless of who is in power.
So I would say there will be more continuity in terms of economic policy rather than differences between Trump and Biden. And on income inequality, I would say there's been a massive rise in income and wealth inequality. That's why even the GOP has become populist and against Wall Street, big business, big tech. It's not very easy to address income and wealth inequality. But if you can invest in your country, invest into infrastructure, invest in manufacturing, investing into reshoring, over time, those type so policy can help blue collar, white collars, and those left behind, regardless of who is in power.
RICK NEWMAN: I mean, you're endorsing protectionism to some extent, correct?
NOURIEL ROUBINI: I'm not endorsing protection. I'm saying there are some elements of derisking or decoupling that for geopolitical reasons we have to do. As Jack Sullivan said, we want a small yard with high fences to see what's actually truly strategic. And paradoxically, when Trump imposed tariffs against Chinese goods, those were just consumer goods. They were not strategically important. While in the case of Biden is semiconductors, technology, and other things that are strategically important to the United States. So even if you want to derisk, you have to do it in the right way.
RICK NEWMAN: Is there anything that you feel Biden should be doing in that regard that he is not doing?
NOURIEL ROUBINI: I think the biggest problem that we're facing is one of our large budget deficits. Some of the strong growth is coming from very loose fiscal policy. It started under Republicans. First, the tax cuts of Trump and then the stimulus during COVID. And it was continued by the Democrats.
The trouble is when Republicans are in power, they cut taxes, but they are unable to cut spending. And when Democrats are in power, they increase spending, but they cannot raise taxes as much. And therefore, we have structural large budget deficits that stay regardless of a Republican administration or a Democratic. And now, this large budget deficits are leading to a rise in interest rates, nominal real, both on the short end and the long end, and that can crowd out economic growth over time. So that's the biggest risk we face.
So whoever is going to be in power, eventually fiscal consolidation is necessary. But because of the partisanship between the two parties, we're not going to have a resolution to this problem, especially of entitlement reforms because our Social Security System and our Medicare, of course, are not sustainable. Pay as you go system with large unfunded liabilities.
RICK NEWMAN: Yeah. OK, good. I'm glad you got into that. And just a couple of minutes left. Let's see how much we can cover on the bond market. Can you tell our audience how much of the recent increase in longer term rates, the rates that affect mortgages, car loans, and so forth, how much of that do you attribute simply to the size of the US budget deficits, which is ongoing, treasury issuance, because there are other things going on. China is not buying US treasuries the way it used to. It's actually selling and things like this. So can you isolate out for us the effect of the US fiscal situation on rising interest rates?
NOURIEL ROUBINI: Well, the short rates have been rising because of the Fed tightening. Long term interest rates have been rising in part because of a tighter monetary policy, but also in part because we have now larger budget deficits. The Fed, instead of buying the bonds, is doing quantitative tightening, selling them passively. The demand for treasuries from our strategic rivals, of course, is falling because they're worried about us seizing assets of China, like we did for Russia, Iran, and North Korea. As the Japanese normalized policy rates, money is going to flow back from treasuries back to Japan.
So the supply of treasury is going to be large because of the large budget deficits. Demand from actors, whether it's the Fed, foreign sovereign wealth funds, or private investment is falling. And therefore, the new equilibrium is one in which nominal and real yields are going to be higher for longer. I would say the equilibrium 10-year treasury is not anymore 1%. It's probably something like 5% to 6%. 2% inflation and at least 2.5% real rates.
RICK NEWMAN: So you wrote the book, Mega Threats, which is out in paperback today, I think.
NOURIEL ROUBINI: Yes.
RICK NEWMAN: Is this a mega threat?
NOURIEL ROUBINI: Yes. In the first two chapters of my book, the first two chapters, the first one is titled The Mother of All Debt Crisis. And I pointed out that debt to GDP ratio, private and public, implicit and explicit have gone through the roof for the last 40 years. However, until 2020, while debt ratios were high, debt servicing ratios were low. Zero policy rates, negative policy rates, quantitative easing, credit easing.
There were $18 trillion equivalent of public debt in Europe and Japan, up to maturity of 10 years, and then negative nominal yield until 2020. That party is over. As interest rates rise on the short end and on the long end of the yield curve, debt servicing ratios are now becoming higher and higher. And whether you are a household, or a corporate, or a business, or a bank, or another financial institution, or a government, or a country, there's too much debt and leverage. Eventually, you're going to end up into debt distress.
Now if you are an emerging market, you have to default. If you're an advanced economy, borrowing local currency can always wipe out the real value of long duration fixed income through unexpected inflation. And that's what I think is going to happen. We're not going to default on the debt. We're going to wipe it out the way with inflation over time.
RICK NEWMAN: OK. I hope President Biden is listening. We have outlined the problems, started talking about a few solutions. Nouriel Roubini, Thank you very much for joining us.
NOURIEL ROUBINI: Thank you.