A prominent political economist who served briefly as an adviser to President Obama said Friday he thinks the chances are about even the U.S. economy is headed toward another recession.
"I would have said last week or the week before probably not. I think we're up to about 50/50 in terms of probability," said Robert Reich, a left-leaning political economist who served as Labor Secretary in the 1990s. Reich also served on Mr. Obama's economic transition advisory board.
"A lot of people thought that once the debt ceiling crisis was over, once there was no problem with regard to defaulting on the nation's debt that everybody would breathe a sigh of relief, markets would breathe a sigh of relief but actually we have the opposite response," Reich said on CBS' "The Early Show."
"Many people who understand the economy now understand something very fundamental, and that is the new budget deal has tied the hands of the government, making it more difficult for the government to respond to this crisis in aggregate demand, the fact that people are not spending enough, with additional boosts to the economy," he said.
Shortly after he made the comments, the Labor Department said the economy added 117,000 jobs in July, below the roughly 150,000 necessary to keep pace with population growth. The unemployment rate, which is calculated separately, fell to 9.1 percent from 9.2 percent, in part because almost 200,000 people gave up looking for work in frustration and are therefore not counted as unemployed.
The Dow Jones Industrial Average posted its largest one day point drop since the financial crisis in 2008 on Thursday, declining more than 500 points as fear of a slowdown prompted investors to sell their holdings. Stock futures Friday reversed course after the better than expected jobs figures.
After weeks of political bickering, Mr. Obama on Tuesday signed legislation to raise the nation's legal borrowing limit to about $14.7 trillion amid pledges to cut government spending by about $2.4 trillion over the next ten years.
The U.S. was very close to the prior limit of $14.3 trillion and Republicans demanded that any increase in the limit, which caps the amount the U.S. can borrow to pay bills for money already spent, be offset by an equal amount of future spending.
The liberal Reich said that focus on austerity makes it more difficult for the economy to get back on its feet.
"This budget deficit is important over the long-term but now you need to take action to spur growth. For example, exempting the first $20,000 of income from payroll taxes for two years or amending the bankruptcy laws so people can actually declare bankruptcy on their primary residence and have more bargaining leverage with lenders or expand earned income tax credit," Reich said.