An old Far Side cartoon shows a cook about to throw lobsters into a kettle; a lobster says, “Auntie Em! Auntie Em! There’s no place like home! There’s no place like home!” Americans (whom God looks out for along with drunks and small children, in the apocryphal words of Bismarck) are accustomed to happy endings when all looks bleakest. The economics profession (or most of it) as well as the public soldiered through 2009 in the expectation that this business cycle would lead to a recovery just as other business cycles led to a recovery, and that jobs would materialize just as they did in the past.

We see the magical incantation, “There’s no place like home!,” in numerous guises. The unemployed–20% of Americans according to a Gallup poll of 20,000 individuals–are more likely to support President Obama than the general public. They still hope against hope that Obama will wave a magic wand and allow them to click their heels and go home. I dubbed him “Obama bin Lottery” in January 2008 after his surprise South Carolina primary victory. With nothing to lose, the unemployed might as well hope:

If Reagan offered “voodoo economics”, as his opponents charged, Obama is selling Cargo Cult economics. After World War II, New Guinea aborigines build model airfields to entice the gods to bring them “cargo”. They watched American soldiers build airstrips and land cargo planes, and sought to accomplish the same through sympathetic magic. Given the culture of the aborigines and their observations, anthropologists aver, making radios and observation towers out of straw and coconuts was a rational response. Something similar might be said of the position of the American middle class.

And we see it on the conservative side, in CPAC’s choice of Ron Paul (R-Tex.) in its presidential straw poll this week. Rep. Paul is a nut case. The fact that a plurality of conservative activists voted for him suggests a desperate sort of nostalgia for a bygone era that never quite was–just get big government out of our hair and things will normalize. It’s just as pathetic as the residual hope that Obama will fix everything.

Americans have trouble realizing how much trouble they have. The numbers trickling out during the past couple of weeks suggest a Wile E. Coyote effect, to mix pop culture metaphors. During 2009, most people just didn’t look down. But with 30% of home mortgages at the waterline or below it, and a 20% effective unemployment rate, the household balance sheet is shot–and so is the balance sheet of small business. In January, Americans took a collective look down, and the numbers began to plunge like the Road Runner’s canine nemesis. The first to go, of course, was consumer confidence, a squishy number to be sure, but one that does not often show a 10-point drop.

The durable goods number (down 0.6% ex-aircraft) is concerning, given that durable goods remain at such a low level:

It tells us that capital investment is not going to lead the way out of the Great Recession (which we might as well call a Second Great Depression).

Employment data remain terrible, and the nearly 500,000 level of new unemployment claims reported this morning make it very likely that the February payroll number will be worse than January’s. As I noted Feb. 5, the actual number of unemployment according to the BLS household survey rose by 541,000 during January, but seasonal adjustment showed a fall in the unemployment rate. Seasonal adjustment presumed that employers hired a bunch of people in December as they used to, and let them go in January. But this time they didn’t hire them in December to begin with, and seasonal adjustment is senseless. That means the seasonally-adjusted unemployment rate will have to rise to compensate in February and March — so prepare for a really ugly number.

The US economy simply can’t run on 20% unemployment. Consumers will go to the mattresses, retail and service business will drop like flies, investors will pull in their horns, and things will get worse. The only way to reverse the problem is to persuade capital to take more risk, and the only available policy lever to accomplish this is the elimination of taxes on capital income–interest, dividends, and capital gains. As the Obama administration is proposing the precise opposite (an increase in taxation of all these categories supposedly for Medicare) it is more likely that policy will aggravate the problem rather than cure it.

It’s still a long, long way down.

This entry was posted on Thursday, February 25th, 2010 at 12:12 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.