What Doug fears [about the unemployment numbers] is that sometime soon households will change their states of mind: they will think that the risk of losing and then being without a job, or being unable to find anything other than a crappy job, is too high; and thus that they need to cut back on their spending significantly in order to build up their buffer stocks of savings as a way of insuring themselves against being ground into mush by the gears of the lousy job market.
If households' states of mind do shift in that direction, then we are in real, real trouble. The Bush Administration is incompetent at countercyclical policy. The Federal Reserve is out of ammunition, and cannot do much more to stimulate spending.
My wife compares this to the old adage that planes fly only because people believe they can. One day they realize a big heavy metal box can't possibly fly ...
Of course there's a historic solution to unemployment. Start a war that will need a lot of labor. Good think Bush thought about that ...
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