Commentary - Irwin Stelzer: So much confusion about the economy

WASHINGTON (Map, News) - If you used part of the long weekend to figure out where the economy is headed, and ended up in a state of confusion, you are not alone.

Consider this: A Los Angeles Times/Bloomberg poll shows that 78 percent of Americans think we are in an economic recession. A virtually simultaneous CBS News/New York Times poll found that 72 percent of Americans rate the financial situation of their households as “good.”

That brings to mind the old joke about the man who denies that he is having a relationship with a woman other than his wife when the spouse discovers them in bed together. “What do you believe, your own eyes, or what I tell you?”

Apparently, Americans believe the media, which are telling them there is a severe recession, even though their own eyes are telling them things aren’t so bad. But don’t blame it all on the media. There is good reason for confusion.

Many homeowners are in or close to default, but the vast majority is not. A majority of the Federal Reserve’s monetary policy gurus decided to lower interest rates at their last meeting, but some key members feel that inflation, not a recession, is the biggest problem the Fed faces. Banks report new write-downs, but also that they have been successful in raising new capital to shore up their balance sheets.

Most confusing of all, the government reports that inflation is more or less under control. Core inflation — excluding food and fuel — rose only 0.1 percent last month. Good news — unless you eat, or own a car.

Food eats up about 13 percent of household budgets, so when egg prices jump 40 percent over last year’s level, milk prices go up 26 percent, and bread prices rise by 15 percent, household finances are strained.

Gasoline is a less important component of household budgets, accounting for about 4 percent of total spending. But three circumstances make it an important inflation indicator for the average consumer.

First, we not only buy gasoline often, but pass giant signs proclaiming the new, higher prices several times every day. Second, the increase in prices to close to $4 per gallon has been extraordinarily rapid. No gradual adjustment possible, except to stay home this past weekend, as many families decided to do.

Third, the knock-on effects are obvious: Airfares are rising and flights are being eliminated to save fuel, making that summer vacation more expensive.

There is something less obvious but more important than the dollar impact of this fuel and food inflation. It adds to our sense that events are in the saddle and ride mankind.

Prices are out of control; foreigners control the oil on which we depend and the price we pay for it; the president gets short shrift from robed rulers of a tiny kingdom that happens to sit on large reserves of oil; suicide bombers in cloth robes mock our armed-to-the-teeth soldiers in Iraq; China pays the higher oil and food prices but continues to produce goods far more cheaply than we can.

To make matters worse, most Americans have lost faith in the willingness of the president or Congress to get a grip on things. Little wonder. congressional committees made something of a spectacle of themselves last week by blaming oil company executives for high oil prices, while barring them from exploring for new reserves in Alaska and offshore California, Florida and other states.

Worse still, Congress got rolled by the farm lobby and appropriated $307 billion for mostly rich farmers whose incomes have already been driven skyward by the rising price of the foodstuffs they produce. The president’s veto was easily over-ridden.

But a $14 trillion economy can tolerate a good deal of waste and still function quite well, and a new president with a fresh mandate should be able to eliminate the worst excesses if he chooses to do so.

Meanwhile, the market and the actions of the Fed have reduced the likelihood that the credit crunch will result in a collapse of the financial system. Investors are buying up the dicey mortgages at a discount, and banks are raising new capital so they can return to the business of lending.

Most important, the credit and oil-price shocks are triggering needed reforms. Mortgage lenders will face new regulations, and banks new capital requirements. Consumers are switching en masse to more fuel-efficient vehicles and to public transportation.

And more and more voters are registering to let the current crop of politicians know what they think of them come November.

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