Economic Pessimism, Reasons 1-5, with a Kicker

The short-term outlook continues to be bleak for the U.S. economy.  Though I'm not in the Krugman camp for policy reasons, I concur with his macro pessimism. I still haven't gotten the memo that the recovery has arrived.  My reasons:

1. Jim Hamilton (via Bill Gavin) adjusts the unemployment rate.

 
  
2. Jobless Claims have not cauterized. Anything above 400,000 new claims per week means the economy is bleeding out. This morning's weekly release is 472,000, the high level its been stuck at for ... years.  You can't hype how bad this is.

3. There's an analogy to oil bleeding out in the gulf. Maybe it's time to blow it up?

4.  Home prices will drop another 5-10%, says Calculated Risk.

5.  Policymakers are out of ammo (see my Depression Index, which hasn't changed much in the year since I described it).  But wait ... maybe this is good news!

I recommend John Tamny's essay in the WSJ today about postwar Germany's rejection of "spending Keynesianism" in favor of what I call "tax-cut Keynesianism."  Krugman's notion of big push stimulus has failed spectacularly, again, and it's time to respect the empirical outcome.

So, here's the good news.  Economies are dynamically stable, not dynamically unstable. Any economy naturally finds an equilibrium if only the masters of institutional policy will let it.  But the animal spirits need a sense of certainty, something sorely lacking in the U.S. right now. Without certainty, state policymakers will continue to make fantasy budgets. Without certainty in mortage tax credits, no one will know when home prices are real.  But once genuine commitments to fiscal stability and tax policy are made, the transition to real growth will be swift. Remember, the credibility story was validated regarding monetary policy in fighting inflation (see Volcker, Paul).  We need our policymakers to understand that credibility trumps stimulus in promoting growth.

Comments

[Curly]

The wild spending that the government has been doing since 2007 has not worked. In fact many of what the government has done and is continuing to do will work to the negative. The (government) spending and the health care law has put much uncertainty in the economy. The spending alone is enough to scare most because most realize that the debt will require tax(s) increase(s). The uncertainty of the cost of health care to the companies and individuals alike makes companies large and small hesitate about adding new employees. The cost is incalculable at this time and with the expiration of the (Bush) tax cuts taxes will go up starting in 1-1=2011. With so many uncertainty why add employees when you may not be able to afford them.
With the rumor (and it may be very valid with the need to raise new taxes) that the interest on home mortgages will be no longer deductible and with the unreliable of employment people are and will not be buying houses. This is seen with the down turn of home sales after the credit expired.

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