Arguing with my more optimistic peers over the state of the US economy, I feel like John Cleese insisting to Graham Chapman that the parrot he has just purchased is in fact dead. Corpses move, and not only because the pet-store owner shakes the cage, due to the onset of rigor mortis. The recovery camp gives too much emphasis to the improvement in industrial production. Inventories fell so far during the third quarter of 2009 that some increase in output is required merely to keep the pipeline going.

Far more indicative of the state of the economy are today’s 16% drop in pending home sales and the jump in foreclosures on prime mortgages. You can’t run an economy with a 22% effective unemployment rate without sustained hemorrhages in consumer credit. And you can’t get a recovery in employment as long as the main providers of new jobs — small business and state and local governments — remain prostrate.

As Paul Krugman observed in his year-end New York Times column, the just-concluded decade is the first since the Great Depression in which private sector employment actually fell. The difference was made up by state and local government hiring. Catastrophic deficits at the state level will force job cuts. The Center On Budget and Policy Priorities projects aggregate state deficits of about $200 billion for 2010. Most states aren’t allowed to cover deficits by borrowing and will have to cut costs. A rough guesstimate is that state and local governments will shed a quarter of a million jobs during 2010.

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