The unemployment benefit filings fell last week for the third time in four weeks. This is the lowest level in nearly three years. At 388,500, it's below the 400,000 marker. Economists say that when applications consistently (the operational term is "consistently")fall below 400K, that signals a decline in the unemployment rate. And that's what happened. At 8.9% last month, the unemployment rate is significantly better.
Although some economists expected a rapid bounce back, that clearly didn't happen. Krugman's explanation is helpful.
The bubble economy of the Bush years left many Americans with too much debt; once the bubble burst, consumers were forced to cut back, and it was inevitably going to take them time to repair their finances. And business investment was bound to be depressed, too. Why add to capacity when consumer demand is weak and you aren’t using the factories and office buildings you have?
The only way we could have avoided a prolonged slump would have been for government spending to take up the slack. But that didn’t happen: growth in total government spending actually slowed after the recession hit, as an underpowered federal stimulus was swamped by cuts at the state and local level.
So we’ve gone through years of high unemployment and inadequate growth. Despite the pain, however, American families have gradually improved their financial position. And in the past few months there have been signs of an emerging virtuous circle. As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation.
The Wall Street Journal reported the data, but provided little commentary. Krugman was not so constrained. He argues, like the huge majority of economists, that deficit reduction is inappropriate at this point in time. The danger, he says, is that deficit cutting now is job-destroying.
The real political problem is that the population thinks about the deficit the way it thinks about the family budget. Analogies are powerful persuasion strategies, and Conservatives make hay with analogies. If you're in debt, you've got to get out of debt, ASAP. Anyone who understands macro-economics knows that's not true. Although Bernanke regularly attempts to educate the public and the politicos, it doesn't go down well. It's quite probable that spending cuts, as Krugman writes, will undermine the future and threaten to abort the economic recovery.