A coordinated global economic slowdown is underway, but the U.S. economy will eventually return to form, Nobel Laureate Michael Spence told CNBC’s“Squawk Box” on Monday.
“The developing countries, with China in the lead, are slowing down largely because of the major slowdown in Europe,” the New York University economics professor said, which has been the result of massive de-leveraging.
He added the "macro risks" of Europe's debt crisis and looming recession is jeopardizing U.S. economic activity, particularly the "non-traded sector" that is reliant on domestic demand.
Spence said that the U.S. economy, unlike emerging markets or smaller economies, is more dependent on this non-traded sector of the economy, particularly for employment. “So that one’s just got to heal,” he said.
A large part of the U.S. economy is suffering not only from weak domestic demand, but also a slowdown in emerging markets, Spence added. That impact also stems from sharply lower European growth.
“We were relying on the one growth engine in the world, which was the emerging economies coming out of the crisis, and now they've slowed down because of the hit they've taken primarily from Europe,” Spence said. “You're starting to see top line growth falter there, and that won't help us either.” (Read More:For These Four Nations, 2012 Is Worse Than the Great Recession.)
Fed Chairman Ben Bernanke "has been consistent in saying they do not have all of the policy instruments to take care of the problem,” he said. “Maybe they believe that they can, by knocking down long-term interest rates...make it easier to service your debt.”
Speaking about the country’s fiscal problems, Spence cautioned against forcing through austerity measures too soon or too fast — which could cut the legs out from already fragile domestic demand. He also favors revamping the tax system, and supports a value-added tax as well as cuts to corporate tax rates. (Read More:Tackling the Holy Grail of Tax Reform: Loopholes.)
Despite all the current challenges, Spence expects the U.S. economy to eventually get back into a groove, “partly because there are so many parts of the economy on the private sector side that are dynamic and functioning fine.”
He added: “I think people will get motivated and get back in the game.”