Don't Call It a Comeback

For the last week or so there has been a faint drumbeat of positive economic news. Consumer confidence ticked slightly higher in March, new home sales actually increased in February, durable goods orders have increased, inventories declined, and stocks rallied. Certain "market watchers" have told us to jump back into the stock market, the media is reporting signs of "economic hope", and Ben Bernanke talked about the economy's "green shoots", prompting an online debate about recovery hosted by The New York Times.

The response to this rather superficial positive news - after all, foreclosure activity increased again in February and the unemployment rate rose to 8.5% - was necessarily swift. Paul Krugman pointed to an increase in industrial production in 1931; Tyler Cowen warned about "suckers' rallies" and what will happen when Bernanke is eventually forced to hike interest rates; the new Baseline Scenario holds that "The one positive sign is that some forecasters are beginning to recognize that growth in 2010 is not a foregone conclusion"; at Vox EU economists plotted frightening graphs showing how the global downturn is in some ways worse than the Great Depression; and a gargantuan op-ed in the Wall Street Journal on Monday very chillingly sourced both the Great Depression and the current economic collapse to a consumer debt crash. In sum, the economic picture became worse for its comparison to the titillating glimmers of economic rebound.

This rather overwhelming - and convincing - response to the first "green shoots" of the economic crisis suggests that we've reached a significant, even threshold, moment that policymakers must utilize. Indeed, the reaction against the "bright-side-of-the-street" perspective has emphasized not only that economic recovery is probably still quite far off, but that recovery itself will occur first (and of necessity) with increased production and business activity, while unemployment rates continue to rise and households remain cash-strapped and equity poor.

Policy action is necessary now particularly because the response to the economic (and financial) crisis has been so swift and (somewhat) robust, at least compared to the Great Depression (as the economists graph at Vox EU) and at least compared to Europe (as Tyler Cowen notes in the Wilson Quarterly). Now that much political juice has been expended passing the first stimulus package packed with tax cuts and bailing out various financial institutions, there seems to be little desire left to assist ordinary households.

But as many as 700,000 people are set to exhaust already extended unemployment benefits even as the unemployment/underemployment rate reaches 15.6%. Rising unemployment increases the ranks of the uninsured and further burdens public programs like Medicaid and SCHIP that are already facing funding cuts. There has been no discussion of what to do to assist the uninsured during the economic downturn and before health care reform actually takes effect. Indeed, consensus makers in the Senate stripped significant extensions of health insurance benefits to unemployed workers from the original stimulus package. The Obama housing plan has not had time to work yet, but the most direct measures to help homeowners (and punish banks) - like extending bankruptcy modification to primary residences and actually forcing principal write downs - have not been taken.

This is really to say that the economic outlook for ordinary households is bleak. But the significant pushback to the first murmurs about recovery provide an opportunity for policymakers to make several short-term improvements, including further extended unemployment benefits, monitoring and further incentivizing unemployment insurance programs that expand benefits to former part-time workers, and bridge insurance programs for the unemployed.

One hopes that these misery-reducing policies are palatable to politicians. Unfortunately, economic recovery probably demands much, much more.