More and more do I worry about the lost decade that Krugman has warned of repeatedly. I have thought him a bit alarmist, but his insistence that the government is not taking this seriously enough and doing too little looks pretty prescient right now.
Let's hope this is true:
The dismal numbers may change the economic debate in Washington and potentially revive calls for the Federal Reserve to engage in another round of asset purchases, Mr. Ashworth said. Democrats and labor-oriented groups have also amplified their pleas for Congress to delay deficit-reduction measures.
“Living here in Washington, in the past few weeks there has been all this talk about deficits and the debt ceiling as though that were the biggest problem right now,” said Heather Boushey, a senior economist at the Center for American Progress, a liberal research organization. “My fervent hope is that this shocks policy makers into realizing the most urgent problem in front of us right now is jobs.”
Some smart analysis from the Economist:
It's not too difficult to spot the sources of economic weakness in the details of the report. Manufacturing employment fell by 5,000 jobs in May after rising steadily in previous months, a testament to the worsening outlook for exports in a weakening global economy. Retail trade employment growth also tumbled, as nervous consumers trimmed spending. America's job woes have also been self-inflicted. Private firms have added over 1.7m jobs in the past 12 months, but the government has shed nearly half a million over the same period (not counting the loss of temporary Census jobs last year). Local governments alone have cut 446,000 positions since September of 2008. Some of those government jobs losses reflect a sensible rationalisation of workforces. Too many of them reflect the damaging effect of pro-cyclical budget cutting due to balanced-budget rules in cash-strapped states. More federal aid to states might have dampened the reductions, easing the drag on national growth.
Budget issues at the federal level may also be contributing to the slowdown. Unexpectedly large federal budget cuts are chipping away at quarterly growth rates with less of a cushion than previously imagined. The 0.5 percentage point drag due to slashed spending seems less problematic when the economy is expected to expand at 4%—as was once hoped for the first half of 2011—than when it's growing at less than 2%, as America's did in the first quarter, and as forecasters are increasingly predicting for the second quarter.
I have, for my part, warned of the problem of 50 states making drastic budget cuts simultaneously and argued for some very quick and VERY easy fiscal stimulus: block grants to the states. Now, I think, we are beginning to see the problem manifest itself. Bad days.