Ian Welsh: Get ready for a second downleg in the economy

In scouring for economic forecasts that make sense, as the Dow hovers near 10,000 (one of our magic numbers), I found this, from Ian Welsh.

The piece gathers together several economic observations — for example, small investors are leaving the stock market, and here's how to think about what the Chinese are doing. But I want to focus on this, his reasons why we're starting a second downleg of what he's calling a "depression" (my emphasis):

In terms of the US economy, it’s pretty clear we’re in a second downleg of the Depression, as predicted. The key issues are that States and municipalities are essentially bankrupt, and that corporations aren’t hiring. Corporations aren’t hiring because their profits are fine, and because they don’t see where the sustained growth would come from. States and municipalities are having income issues because the incomes of median taxpayers have not recovered and the number of employed is not increasing (ignore the “unemployment rate”, what matters is how many people are employed and that hasn’t recovered worth a damn.) Since States and municipalities have limited ability to borrow and can’t print money, in both cases, unlike the Feds, this means they must cut or raise taxes and in general States are ideologically opposed to raising taxes and municipalities don’t feel they can. Housing prices remain depressed, which is the main source of money for municipalities.

Since there is no chance of a real stimulus being passed . . . and since Obama refuses to spend the TARP money on the economy until it’s his reelection on the line rather than Congressional Dems, and since there’s no obvious source of new jobs in the US economy, I see little reason to expect the US economy to recover. Even if the world economy somehow does, it will route around the US, since the US is a high cost domicile and there is no good reason to produce in the US. In the old days you produced in the US because that was where the next big tech boom occured, the skills were there, and you needed in. With the deliberate strangling of innovation in the US due to the oligopolization of the economy, the next tech boom (if there is one) is unlikely to occur in the US.

Overall, there isn’t a lot of reason to be cheerful. If the economy does manage to pick itself up off the floor, that would mean an increase in the price of oil, and inside of two years (and probably inside of one, if it was a good recovery) that increase would spike the recovery in any case.

There's some if in there, but I can't fault the underlying facts. Food for thought.

Two fast points:

The "employment rate" vs. the "unemployment rate." Both are released, but the Employment Rate is the one to watch. The Employment Rate tells you what percent are employed; the Unemployment Rate tells you what percent are unemployed minus several fudge factors, like those who have "stopped looking." Last I checked, if you were unemployed and stopped looking, you were still unemployed.

States and taxes. Jeez — isn't it obvious? If we could claw back those tax give-aways to corporations and the top 120,000 wage-earners in the country, we'd be home free, at both the national and state levels.

Won't happen; and that, if nothing else, drives every hole we're digging ourselves. In my view, we either reverse all of those tax cuts, including the Reagan tax cuts, or we sink beneath the waves while shoring up their boat. Simple choice.

There's a growing consensus among economists, majors and minors, that the odds of at least a double-dip (if not a full down-move) are much increased. That's not to say this will happen, but if I had to make this-or-that decisions about spending, investing and debt-liquidation, I'd probably make them conservatively.

Again, food for thought.

GP