Are Positive Economic Signs Helping Ordinary Americans?

While some people point to Wells Fargo's surprisingly healthy first quarter last week (Noriel Roubini said in Time magazine last month that Wells Fargo was one of the weaker banks; what happened?) as proof the recession has bottomed out, unemployment is still 8.5 percent and likely rising. A chipper AP story reports that the first week of April had the lowest amount of new jobless claims in months. One good week in the middle of 40 may not be a great indicator, and its impact on the unemployed remains to be seen. This New York Times piece speculates that the strong Dow could be covering up significant problems in the overall economy.

This blog has quoted economist and frequent Commonwealth Club speaker Robert Reich on numerous occasions, but he, along with Paul Krugman, have consistently spoken with clarity and caution regarding the state of the economy. In a Salon article Monday, Reich again tempered the media's newfound bullishness and believes the economic perkiness is due to the massive cash infusion issued by the Treasury.

But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Of course mortgage rates are declining, mortgage originations are surging, and people and companies are borrowing more. So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.

The inclusion of the theory that the recent bump in the Dow is due to the printing of new money was non-existent in most news coverage. Instead, the message in nearly every major story last week, save for a very cautiously optimistic article in the Boston Globe Friday, is that the financial sector is doing well and could indirectly help the pocketbooks of struggling Americans. It's true that short- and long-term interest rates are unbelievably low, but will it translate into more construction of homes? The inventory of already built new homes is high, and recently foreclosed homes are even higher. This could be where Wells Fargo's announced $190 billion in new loan applications are emanating. Once the glut of inventory begins to deplete in relation to low interest rates, where will this segment of the economy look like?

The attitude of much of Wall Street is to keep things positive; to keep the wheels of finance rolling. But it's likely that more than a half million additional workers will get a pink slip this month. Add to this the previous 5 million, and you have quite a segment of the population scrimping and saving and not purchasing goods and services. Until Americans see their own personal economies picking up, the overall mental health of the economy will not be viewed as looking as rosy as recent news reports might be leading people to believe.

--Steven Tavares

Maybe We Can Fake Our Way Through the Recession?

If economists Paul Krugman and Robert Reich are correct in their fears that the economic stimulus package recently passed by the U.S. Congress and due to be signed this week by President Obama is too small, some are suggesting another option: Bluff.
That's the idea that is discussed by neuro expert Jonah Lehrer in a recent posting in his blog.
Lehrer, who will speak on "the science of decisions" February 19 at a Commonwealth Club Inforum program, writes:

Over at the Economist, a number of economists have been speculating on the possibility of an economic "placebo" that would boost consumer confidence without actually triggering a massive spike in government spending. In other words, it would be a Keynsian bump without the cash, akin to giving someone a sugar pill and telling them it's Prozac.
...what does this mean for a potential economic placebo? The key lesson is that placebos work by manipulating our expectations: because we expect the pill to make us happier, we end up feeling happier. This suggests than any economic placebo would need to entail more than just a piddling rebate check, or some other short-term (and hopefully cheap) stimulus. The problem with these measures it that they don't alter our expectations - they just make the present a little bit less unpleasant. Instead, a genuine economic placebo would need to focus on modulating our long-term expectations, so that we become convinced that next month, or next quarter, or certainly next year, things will start getting better. The question, of course, is how the government could do this.

So even a placebo is going to cost a lot of money? I guess there's no cheap way out of this.
See Lehrer for yourself at The Commonwealth Club. And read his blog for some intelligent and often humorous applications of the "science of decisions" to our lives.

Some Economists Fears that Stimulus Bill Is too Small

President Obama will likely sign a stimulus bill this week roughly the same size he initially offered, but wholly different in composition. Some like Robert Reich and New York Times columnist Paul Krugman never thought it was large enough in the first place, and the watered down bill is furthering their anxiety. Krugman wrote last week:

And I don’t know about you, but I’ve got a sick feeling in the pit of my stomach — a feeling that America just isn’t rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

During a speech last month at The Commonwealth Club of California, former Labor Secretary Robert Reich reiterated his belief that the stimulus bill should be over $900 billion or more over the next two years. On his blog he wrote this week:

But what if the stimulus isn't big enough? (I fear it won't be, given the large and growing gap between what the economy can produce at near full-employment and the meager demand coming from consumers and businesses.) And what if the bailout doesn't quite work? (It may not, given that the banking system is collapsing and many banks are actually insolvent.) The economy in November of 2010 may be worse than it is now, with no turnaround in sight.

Reich also predicted during his Commonwealth Club address that President Obama might bargain with Republicans to win votes in a bipartisan fashion. This indeed occurred, and the nearly across-the-board rejection by Republicans of the plan has rankled many Democrats. Joan Walsh at Salon wrote today about President Obama, "He better have learned that Washington bipartisanship is dead." Even the president's chief of staff, Rahm Emmanuel, admitted that working with congressional Republicans who were dead set against the bill was a mistake. Not surprisingly, the editors at the conservative National Review declared President Obama's economic plan already has a ring of "no-confidence" surrounding it.

--Steven Tavares

Is the National Review correct in its description of the state of Obama's economic plan? What do you think about economists' Reich and Krugman arguing that the stimulus is actually too small? Leave a comment and join the discussion.

Rich Lose Billions While the Poor Get Poorer

THOSE ALREADY ON THE BOTTOM ARE TAKING A GREATER HIT

Staggering amounts such as $700 billion for the financial service industry and the relatively paltry $15 billion proposed for the auto industry pale in comparison to the estimated $1.7 trillion the recession will exact in future losses by the continuing plight of America's poor.

A study released today by a bipartisan child advocacy group takes into account that children born in poverty tend to become lower wage earnings and suffer from poor health without the help of consistent health-care coverage.

The Center on Budget and Policy Priorities said last month that more than 10 million adults and 3 million children could dip into poverty during the current economic downturn and may further hamper those still reeling from the previous recession of 2001.

A story from earlier this year when the state of the economy was bad, but not yet in the free fall that is seemingly occurring today, explained that while the economy expanded after 2001, the number of those in poverty increased by over a million.

This unfortunate phenomenon was touched upon last year by Nobel-winning economist and New York Times columnist Paul Krugman during a speech at The Commonwealth Club where he said, "There have been huge gains at the top of the income distribution. A few people got much more richer, and that took all or almost all of the gains."

Krugman also explained a notion that, a year later, seems quite prescient: "We are fully back to the levels of inequality not seen since the 1920s. It's an extraordinary thing."

As many media types struggle to pin a moniker on this "financial crisis" (this one has nearly runs its course), some are now calling it the "Great Recession." Either way, it is the poor who are shoulder the biggest burden.

The Department of Labor said last week that more than 573,000 Americans applied for unemployment insurance. Indiana's fund is insolvent and California, New York, Ohio and Rhode Island may not be far behind. If government aid is struggling to keep up with demand, it is likely non-profits that fill in the cracks are having trouble keeping their doors open.

Nearly half of the non-profits in the Twin Cities area of Minnesota are resorting to staff cuts because of higher costs and dwindling donations.

A feature story from the Rocky Mountain News illustrates in detail the problems the poor and local non-profits have keeping people warm and nourished. Similar problems are surfacing in the San Francisco Bay Area.

Just last September, an Alameda County non-profit that administered health care to about 1,000 East Bay children closed its doors – and this is in one of the country's wealthier counties.

Gaudy figures on the pages and web sites of the newspapers' business sections may titillate headline makers across the nation, but it seems during a recession, the poor are the canary in the coalmine.

Paul Krugman Wins Nobel

Princeton economist and New York Times op-ed columnist Paul Krugman has won the Nobel Prize in economics.

The Royal Swedish Academy of Sciences gave him the $1.4 million award in recognition for his work on a new theory regarding free trade. His work "thereby integrated the previously disparate research fields of international trade and economic geography," the Academy said, according to the Associated Press.

Krugman's whose most-recent Commonwealth Club speech was on October 30, 2007, as the first speaker in the A-Ha Speaker Series, presented by The Club and Orrick. In that speech, he spoke about the future of the middle class in the changing economic world, a topic that could be even more relevant today in light of recent stock market meltdowns. See the above video for the Fora recording of that speech. Or you can listen to streaming audio of that speech.

And if you want to go back in time nearly five years, you can listen to streaming audio of his January 6, 2004, speech to The Commonwealth Club, entitled "From Heroes to Scandals: The Collapse of Fiscal Responsibility."