Economist's View - 6 new articles
"The Economics of Nice Folks"
Sam Bowles of the Santa Fe Institute says economists need to recognize the "moral nature of humans":
The economics of nice folks, EurekAlert: A basic tenet of economics is that people always behave selfishly, or as the 18th century philosopher economist David Hume put it, "every man ought to be supposed to be a knave."
But what if some people aren't always knaves?
Sam Bowles argues in Science June 20 that economics will get it wrong then, sometimes badly so. He points to new experimental evidence that people do often act against their own personal self-interest in favor of the common good, and they do so in predictable, understandable ways. Poorly-designed economic institutions fail to take advantage of intrinsic moral behavior and often undermine it. .
Take this example: Six day care centers imposed a fine on parents who picked their children up late. The effect? Tardiness doubled, and it stayed high even when the fine was removed. Parents, it seems, stopped seeing lateness as an imposition on teachers, and instead saw it as something that could be purchased with no moral failing.
Another example is a study this year which showed that women donated blood less frequently when they were paid for it than when it was an act of charity.
These examples show that economists ignore human altruism at their peril. Standard economic theory assumes that incentives that appeal to self-interest won't affect any natural altruism that may exist, but that assumption is clearly wrong. Bowles discusses the research to date that helps to explain when and why that assumption breaks down.
As the world becomes more interconnected and the resulting challenges to humanity increase, learning to harness these altruistic impulses becomes even more important, Bowles says. So the economists' "holy grail," to learn to design institutions and policies to direct the selfish impulses of individuals to public ends, "will be necessary but insufficient," Bowles says. "The moral nature of humans must also be recognized, cultivated, and empowered."
[I think I need new glasses, or a new brain, or something. The above came out yesterday, but since the link to the article by Bowles wasn't going to be available until today, I decided to wait to post anything so I could, perhaps, add a few passages from the actual article as well as link to it. This morning, I glanced at Brad DeLong's site and saw a reference to Sam Boyd - which I managed to read as Sam Bowles - and a link to a piece in Science Magazine which I assumed was the Science Magazine piece by Bowles that was posted today. So I figured Brad had this covered. But I was pretty confused, the Science Magazine piece was to an article dated April 18, 2008, a piece called "First, Kill All the Economists," and the reference to Boyd was in an entirely different post from the link to Science magazine. I wasn't even close. Oh well, if anyone is interested, the Bowles article is here.]
FRBSF: Speculative Bubbles and Overreaction to Technological Innovation
From the SF Fed, the relationship between speculative bubbles, technological innovation, and capital misallocation:
Bubbles are often precipitated by perceptions of real improvements in the productivity and underlying profitability of the corporate economy. But as history attests, investors then too often exaggerate the extent of the improvement in economic fundamentals. —Greenspan (2002)
The magnitude of short-term movements in asset prices remains a challenge to explain within a framework of rational, efficient markets. Numerous empirical studies have shown that stock prices appear to exhibit "excess volatility," that is, prices move too much to be explained by changes in the underlying fundamentals, such as dividends or cash flows. Another prominent feature of asset prices is the intermittent occurrence of sustained run-ups above estimates of fundamental value, so-called speculative bubbles, that can be found throughout history in various countries and markets (see Lansing 2007).
The dramatic rise in U.S. stock prices during the late 1990s, followed similarly by U.S. house prices during the mid-2000s, are episodes that have both been described as bubbles. The former was accompanied by a boom in business investment, and the latter by a boom in residential investment. Both booms were later followed by falling asset prices and severe retrenchments in the associated investment series, as firms and investors sought to unwind the excess capital accumulated during the bubble periods. Coincident booms in asset prices and investment also occurred during the late 1920s—a period that shares many characteristics with the late 1990s. In particular, both periods witnessed major technological innovations that contributed to investor enthusiasm about a "new era." This Economic Letter examines some historical links between speculative bubbles, technological innovation, and capital misallocation.
Bubbles and new era enthusiasm
Shiller (2000) argues that investors overreact to technological innovations. He shows that major stock price run-ups have generally coincided with the emergence of some superficially plausible "new era" theory in the popular culture that extols the virtues of new technology. New era economic thinking is then used to justify a meteoric rise in asset prices and the abandonment of traditional valuation metrics.
Figure 1 depicts four major run-ups in the real (inflation-adjusted) S&P 500 stock index. Shiller associates each run-up with the following technological advances that contributed to new era enthusiasm:
-Early 1900s: High-speed rail travel, transatlantic radio, long-line electrical transmission.
-1920s: Mass-production of automobiles, travel by highways and roads, commercial radio broadcasts, widespread electrification of manufacturing.
-1950s and 60s: Widespread introduction of television, advent of the suburban lifestyle, space travel.
-Late 1990s: Widespread availability of the internet, innovations in computers and information technology, emergence of the web-based business model.
In comparing the late 1920s with the late 1990s, Gordon (2006) and White (2006) emphasize the simultaneous occurrence of major technological innovations, a productivity revival, excess capital investment, and a stock market bubble fueled by speculation. The September 7, 1929, edition of Business Week remarked, "For five years at least, American business has been in the grip of an apocalyptic holy-rolling exaltation over the unparalleled prosperity of the 'new era' upon which we, or it, or somebody has entered." Along similar lines, the March 8, 1999, cover story of Business Week proclaimed, "The high-tech industry is on the cusp of a new era in computing in which digital smarts won't be tied up in a mainframe, minicomputer, or PC. Instead, computing will come in a vast array of devices aimed at practically every aspect of our daily lives."
Business investment and the stock bubble
From 1996 until its peak in 2000, real business investment expanded at an average compound growth rate of 10% per year—about 2.5 times faster than the growth rate of the U.S. economy as a whole. Much of the surge in business investment in the late 1990s was linked to computers and information technology. During these years, measured productivity growth picked up, which was often cited as evidence of a permanent structural change—one that portended faster trend growth going forward. Widespread belief in the so-called "new economy" caused investors to bid up stock prices to unprecedented levels relative to corporate earnings.
The investment boom of the late 1990s now appears to have been overdone. Firms overinvested in new productive capacity in an effort to satisfy a level of demand for their products that proved to be unsustainable. Gordon (2003) documents the many transitory factors that boosted the demand for technology products during the late 1990s. These include telecom industry deregulation, the one-time invention of the World Wide Web, the surge in equipment and software demand from the now-defunct dotcoms, and a compressed personal computer replacement cycle heading into Y2K.
Caballero et al. (2006) argue that rapidly rising stock prices provided firms with a low-cost source of funds from which to finance their investment projects. The resulting surge in capital accumulation served to increase measured productivity growth which, in turn, helped to justify the enormous run-up in stock prices. Figure 2 shows that the trajectory of the S&P 500 stock index, both before and after the bubble peak, is strikingly similar to the trajectory of business investment.
On January 13, 2000, near the peak of the stock bubble, Fed Chairman Alan Greenspan raised the possibility that investors might have overreacted to recent productivity-enhancing innovations: "When we look back at the 1990s, from the perspective of say 2010...[w]e may conceivably conclude from that vantage point that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever. Alternatively, that 2010 retrospective might well conclude that a good deal of what we are currently experiencing was just one of the many euphoric speculative bubbles that have dotted human history. And, of course, we cannot rule out that we may look back and conclude that elements from both scenarios have been in play in recent years."
Residential investment and the housing bubble
Figure 3 shows that one can observe similar comovement between asset prices and investment in the U.S. housing market. From 2001 to 2006, house prices nearly doubled, rising much faster than the underlying fundamentals, as measured by rents or household income. An accommodative interest rate environment, combined with a proliferation of new mortgage products (loans with little or no down payment, minimal documentation of income, and payments for interest-only or less), helped fuel the run-up in house prices. At the time, Fed Chairman Greenspan (2005) offered the view that the financial services sector had been dramatically transformed by advances in information technology, thus enabling lenders "to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately." Feldstein (2007), citing a number of studies, argues that the rapid growth in subprime lending during these years was driven in part by "the widespread use of statistical risk assessment models by lenders."
The subprime lending boom was later followed by a sharp rise in delinquencies and foreclosures, the collapse of numerous mortgage lenders, massive write-downs in the value of securities backed by subprime mortgages, and record-setting levels of unsold new homes. In retrospect, enthusiasm for a "new era" in credit risk modeling appears to have been overdone. Persons (1930 pp. 118-119) describes the fallout from an earlier era of rapid credit expansion as follows: "It is highly probable that a considerable volume of sales recently made were based on credit ratings only justifiable on the theory that flush times were to continue indefinitely….When the process of expanding credit ceases and we return to a normal basis of spending each year...there must ensue a painful period of readjustment."
Conclusion
History tells us that periods of major technological innovation are often accompanied by speculative bubbles as investors overreact to genuine advances in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation. Lansing (2008) shows that even from the narrow perspective of a theoretical model, it remains an open question whether speculative behavior is harmful to society.
On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. On the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem. It should be noted, of course, that the theoretical model abstracts from numerous real-world issues that would affect welfare. One such issue is financial fraud, which has typically accompanied historical bubble episodes. Indeed, the proliferation of fraudulent stock-offering schemes in England during the famous price run-up of shares in the South Sea Company led the British government to pass the so-called "Bubble Act" in 1720 (see Gerding 2006).
Regarding the merits of speculation, Meeker (1922, p. 419), the economist of the New York Stock Exchange, wrote: "Of all the peoples in history, the American people can least afford to condemn speculation....The discovery of America was made possible by a loan based on the collateral of Queen Isabella's crown jewels, and at interest, beside which even the call rates of 1919-1920 look coy and bashful. Financing an unknown foreigner to sail the unknown deep in three cockleshell boats in the hope of discovering a mythical Zipangu [land of gold] cannot, by the widest exercise of language, be called a 'conservative investment.'"
References
[URLs accessed June 2008.]
Caballero, R.J., E. Farhi, and M.L. Hammour. 2006. "Speculative Growth: Hints from the U.S. Economy." American Economic Review 96, pp. 1,159—1,192.
Feldstein, M.S. 2007. "Housing, Credit Markets, and the Business Cycle." NBER Working Paper 13471.
Gerding, E.F. 2006. "The Next Epidemic: Bubbles and the Growth and Decay of Securities Regulation." Connecticut Law Review 38(3), pp. 393-453.
Gordon, R.J. 2003. "Hi-Tech Innovation and Productivity Growth: Does Supply Create Its Own Demand?" NBER Working Paper 9437.
Gordon, R.J. 2006. "The 1920s and the 1990s in Mutual Reflection." In The Global Economy in the 1990s, eds. P.W. Rhode and G. Toniolo. Cambridge: Cambridge University Press, pp. 161-192.
Greenspan, A. 2000. "Technology and the Economy." Remarks. New York City, January 13.
Greenspan, A. 2002. "Economic Volatility." Remarks. Jackson Hole, WY, August 30.
Greenspan, A. 2005. "Consumer Finance." Remarks. Washington, DC, April 8.
Lansing, K.J. 2007. "Asset Price Bubbles." FRBSF Economic Letter 2007-32 (October 26).
Lansing, K.J. 2008. "Speculative Growth and Overreaction to Technology Shocks." FRBSF Working Paper 2008-08.
Meeker, J.E. 1922. The Work of the Stock Exchange. New York: Ronald Press.
Persons, C.E. 1930 "Credit Expansion, 1920 to 1929, and Its Lessons." Quarterly Journal of Economics 45, 94-130.
Shiller, R.J. 2000. Irrational Exuberance. Princeton, NJ: Princeton University Press.
White, E.N. 2006. "Bubbles and Busts: The 1990s in the Mirror of the 1920s." In The Global Economy in the 1990s, eds. P.W. Rhode and G. Toniolo. Cambridge: Cambridge University Press, pp. 193-217.
Paul Krugman: Driller Instinct
Mr. McCain's energy gambit:
Driller Instinct, by Paul Krugman, Commentary, NY Times: Blaming environmentalists for high energy prices, never mind the evidence, has been a hallmark of the Bush administration.
Thus, in 2001 Dick Cheney attributed the California electricity crisis to environmental regulations that, he claimed, were blocking power-plant construction. He completely missed the real story, which was that energy companies — probably some of the same companies that participated in his secret task force... — were driving up prices by deliberately withholding electricity from the market.
And the administration has spent the last eight years trying to convince Congress that the key to America's energy security is opening up the Arctic National Wildlife Refuge to oil drilling — even though estimates ... suggest that ... would make very little difference to the energy outlook...
But it still comes as a surprise and a disappointment to see John McCain joining that unfortunate tradition.
I've never taken Mr. McCain's media reputation as a maverick seriously,... on most issues, he's a thoroughly conventional conservative. On energy policy, however, he has ... seemed to show some independence. Most notably, he voted against the really terrible, special-interest-driven 2005 energy bill, which was backed by the Bush administration — and by Barack Obama.
But that was then.
In his Monday speech on energy, Mr. McCain tried to touch all the bases. He talked about conservation. He denounced the evils of speculation... A weird aspect of the current energy debate, incidentally, is ... that many of the same market-worshipping conservatives who first denied that there was a dot-com bubble, then denied that there was a housing bubble, are utterly convinced that nasty speculators are responsible for high oil prices.
The ... news, however, was Mr. McCain's call for more offshore drilling... This was a reversal of his previous position, and it went a long way toward aligning his energy policy with that of the Bush administration.
That's not a good thing.
As many reports have noted, the McCain/Bush policy on offshore drilling doesn't make sense as a response to $4-a-gallon gas: the White House's own Energy Information Administration says that ... even at peak production its impact on oil prices would be "insignificant."
But what I haven't seen emphasized is the broader picture: Mr. McCain has now aligned himself with an administration that, even aside from its blame-the-environmental-movement tendencies, has established an extensive track record as the gang that couldn't think straight about energy policy.
Remember, they didn't just insist that the Iraqis would welcome us as liberators;... administration officials were also adamant that regime change in Iraq would add millions of barrels a day to the world oil supply, driving oil prices way down...
So why would Mr. McCain associate himself with these characters? The answer, presumably, is that it's a cynical political calculation. I'm reasonably sure that Mr. McCain's advisers realize that offshore drilling would do nothing for current gas prices. But they may believe that the public can be conned...
And Mr. McCain may also hope to shore up his still fragile relations with the Republican base..., many people on the right ... believe that all our energy problems have been caused by sanctimonious tree-huggers. Mr. McCain has just thrown that constituency some red meat.
But I very much doubt that Mr. McCain's gambit will work. In fact, it's almost certainly self-destructive. To have a chance in November, Mr. McCain has to convince voters that he isn't just Bush, continued. Energy policy is one of the areas where he could best have made that case.
Instead, he has ceded the high ground on energy to Mr. Obama, and linked himself firmly to the most unpopular president on record.
Calvo: "Exploding Commodity Prices, Lax Monetary Policy, and Sovereign Wealth Funds"
Guillermo Calvo argues that fundamentals, not speculation, explain rising commodity prices. He says "when analysed from the perspective of some future time, this whole episode will look very much like a bubble in the commodity market, a market mirage, even though what is behind it is a fundamental factor: lower demand for liquid assets by sovereigns like China, Chile or Dubai."
Why have sovereign wealth funds lowered their demand for liquid assets? He argues that lax Fed policy is a big part of the inducement to switch out of liquid assets, and that the commodity price explosion is "a harbinger of higher CPI inflation" in the future. However, all is not lost in the inflation battle, but the Fed needs to "seriously start worrying about inflation and stop chasing imaginary destabilising speculators":
Exploding commodity prices, lax monetary policy, and sovereign wealth funds, by Guillermo Calvo, Vox EU: Oil, metals, and now food prices are heading to the sky with a virulence that is hard to rationalise on the basis of world output growth – not even on the basis of China's and India's fast growth, let alone the expected global slowdown. This phenomenon has been accompanied by much higher transaction volumes in forward markets. Thus, analysts and policymakers have been quick in pointing an accusing finger at the proverbial speculator, who has even been declared persona non grata in some countries, like India, where commodity futures have been banned.
The thrust of this column is that we are not going through another self-fulfilling bubble. Today's explosion of commodity prices is the result of a very real global financial storm associated with large excess liquidity in several non-G7 countries and nourished by low G7 central banks' interest rates. This price explosion could be a leading indicator of future inflation driven by fundamentals.
Commodity stockpiles
Absence of a substantial increase in physical commodity inventories has been mentioned as evidence of absence of speculative activity (by Martin Wolf and, more guardedly, Paul Krugman).[1] But that is not valid. Suppose, for the sake of the argument, that the demand for commodities for current consumption or production is completely inelastic (food and oil are good examples in the short run). If speculators attempt to stockpile commodities, commodity prices will go up. And they will go up as much as necessary to discourage the speculators from adding to their stocks, that's all. To keep matters simple, I will zero in on that special case and explain what drives speculators to stockpile so aggressively as to provoke a price explosion.
Incentives to stockpile commodities stem from the combination of low central bank interest rates (especially in the US) and the growth in sovereign wealth funds. The latter, in my view, is the crucial factor. Sovereign wealth funds have been created partly with the intent of switching the composition of government wealth from highly liquid but low-return assets to more risky but much more profitable investment projects. Thus, their attempt to get rid of excess liquidity resembles the econ 101 exercise in which the student is asked to trace the effects of a portfolio switch away from money and into capital. The answer is – of course – higher prices. I will return to that in a moment after I explain why central bank interest rates are also important.
Interest rates and prices
Take the Fed rate (i.e., the Federal Funds rate). Recently, the Fed rate has been sharply lowered and the market does not expect that it will be raised with equal impetus in at least one year hence. This must certainly add to sovereign wealth funds' determination to switch away from US Treasury Bills, which, incidentally, helps to explain the suddenness of the price rise. However, Treasury Bills do not exactly fit the characteristics of the econ 101 money. If the demand for Treasury Bills goes down, their price will fall until Treasury Bills' holders find the yield attractive enough to drop their other investment projects. In this case there would be no upward pressure on the general price level, but the effective Fed rate will likely rise. This, in turn, will induce the Fed to pump in more liquidity through open market operations, creating econ 101 money (actually, high-powered money) through the purchase of Treasury Bills. Therefore, low and momentarily pegged central bank interest rates imply that the fall in the demand for Treasury Bills results in an expansion of the money supply. Now we can confidently employ the econ 101 result to argue that the portfolio switch implies higher prices. Notice that this argument does not rely on the more standard concern that the Fed is pumping in liquidity to rescue the financial system. This may be a problem in the future but, to the extent that the Fed is simply substituting safe assets for risky assets in banks' portfolios, the policy need not result in a sharp increase in monetary aggregates and prices.
Not all prices show the same degree of flexibility. Commodity prices are at the high end of the flexibility spectrum, while wages are likely to be on the other. Thus, the price rise phenomenon will bring about a change in relative prices in favour of commodities. Interestingly, however, eventually, as the slow-moving prices catch up, these sharp differences across prices will disappear and a much more uniform price rise phenomenon will materialise. Thus, when analysed from the perspective of some future time, this whole episode will look very much like a bubble in the commodity market, a market mirage, even though what is behind it is a fundamental factor: lower demand for liquid assets by sovereigns like China, Chile or Dubai. Overshooting of commodity prices could be large because even though sovereign wealth funds are not large in terms of wealth, they are quite large with respect to monetary aggregates. For example, several reports estimate that sovereign wealth funds' assets under management exceed US$3.5 trillion and are growing fast,[2] while US M1 and M2 are, respectively, US$1.4 and US$7.8 trillion as of April 2008.
Inflation to come
However, US monetary aggregates do not yet show an increase as sharp as that of commodity prices.[3] Should we conclude that the above argument has feet of clay? There are at least two different answers to this potential objection. One answer is that under well-developed financial markets the expectation that a portfolio switch with the above characteristics will take place could trigger anticipatory price increases. The second answer hinges on the observation that Treasury Bills are possibly closer to money than to pure bonds (especially under high counter-party risk). The relevant money concept could be an aggregate involving M2 and Treasury Bills, for example.[4] Thus, the portfolio shift, unaccompanied by a change in the Fed rate, would be tantamount to an increase in money velocity of circulation – another econ 101 experiment with similar inflationary implications. In this case, M2 need not change![5]
In short, my conjecture is that commodity prices are the result of portfolio shift against liquid assets by sovereign investors, sovereign wealth funds, partly triggered by lax monetary policy, especially in the US.[6] Is this a harbinger of higher CPI inflation? If interest rates continue to be low, my answer would be a resounding yes. But there is probably room for an effective anti-inflationary battle. This will likely call for a sharp rise in interest rates and will enhance the risk of deepening recession, particularly if financial vulnerabilities have not been resolved. Thus, policymakers should seriously start worrying about inflation and stop chasing imaginary destabilising speculators.
Footnotes
1 See Paul Krugman "The Oil Non-Bubble," The New York Times, May 12, 2008; and Martin Wolf, "The market sets high oil prices to tell us what to do," Financial Times, May 13, 2008. 2 See JP Morgan Research, Sovereign Wealth Funds: A Bottom-up Primer, JP Morgan, May 22, 2008. 3 However, US M2 has accelerated quite markedly in the first quarter of 2008. In the period from January to April 2008 seasonally adjusted M2 grew at an annual rate of 10.7%, while in the period from April 2007 to April 2008 the annual rate was 6.5%. See www.federalreserve.gov/releases/h6/. 4 There are several papers in the recent literature emphasising liquidity service provided by government bonds. See, for instance, Guillermo Calvo and Carlos Vegh "Fighting Inflation with High Interest Rates: The Small-Open-Economy under Flexible Prices," Journal of Money, Credit, and Banking, 27 (1995): 49-66; and Ravi Bansal, and John W. Coleman "A Monetary Explanation of the Equity Premium, Term Premium and Risk Free Rate Puzzles," Journal of Political Economy, 104 (1996): 1135–1171. 5 Suppose that commodities are a subset of the goods which are transacted by means of M2. Suppose, in addition, that M2 is needed in advance to buy commodities and cpi-type goods. Thus, if cpi-type prices are sluggish and have a large weight, a modest increase in M2 would result in a large spike in commodity prices. This is another possible explanation of why inflation of commodity prices has been much larger than the rate of expansion of M2. 6 The next obvious question is: why did sovereigns (mostly in emerging market economies) engage in excessive accumulation of international reserves? My conjecture is that it was a defensive strategy (not, "neo-mercantilism," as usually labeled) against the US beggar-thy-neighbour policy of staving off recession through lax monetary policy. I will elaborate on that in a future column.
Update: David Wessel says central banks are doing what Calvo is calling for and turning their focus to inflation:
Inflation Now Enemy No. 1, by David Wessel, WSJ: With hardly a pause for reflection, central bankers, markets and economic commentators are casting aside angst that the housing bust and credit crunch might cause another Great Depression and are turning instead to inflation anxiety. ...
Ben Bernanke, a student of economic history, knows that today's conditions are a long way from the Great Inflation of the 1970s. ... But he also knows that the Great Inflation occurred because the Fed badly misunderstood what was happening in the economy and kept interest rates too low and because consumers and businesses expected inflation and acted accordingly.
He wants to avoid the second -- the dreaded increase in "inflation expectations" -- by loudly assuring everyone that the Bernanke Fed knows its history. For much of the past year, Mr. Bernanke has demonstrated that he is determined to avoid a repeat of the Fed mistakes of the 1920s and 1930s that contributed to the Great Depression. He still is. But he also is mindful of the Fed mistakes of the 1970s that contributed to the Great Inflation, and wants you to know that he is determined to avoid those as well.
"Why Worry About the Economy?"
Why aren't people more upbeat about the economy?:
Why Worry About the Economy?, by Jill Stoddard, Columbia Business School, Public offering: The Washington Post reported yesterday that although Americans' perceptions of the economy are very negative, two key measures show that the economy is not as bad as it may seem: unemployment is at 5.5 percent and inflation at 4.2 percent.
One reason for this disparity, according to Professor Eric Johnson, may be the frequency with which consumers are seeing higher prices. "Things that you buy more frequently and that have large percentage increases will weigh more in people's perception of inflation," Johnson was quoted as saying.
He elaborated in the article with the following example: a person paying an extra $25 to fill up the gas tank is reminded of that cost once a week, or more often if you count the times he or she sees a $4-per-gallon price in giant numbers on a sign. In contrast, a rent increase of $100 would only happen once a month but would have the same financial impact.
An inflation rate of 4.2% isn't as bad as it seems, it's just that people are reminded of it too often (where they are reminded by either the size of the purchase relative to the overall budget, or by the frequency of the purchase)? It seems just as likely, or even more likely, that only being reminded once a month leads to an overly optimistic view of the economy. Out of sight might be out of mind, but it doesn't mean the problem isn't still there. In any case, I'm far from convinced that this explains the disconnect, or even that there is a disconnect.
Part of the problem is the presumption in the question, which has been around for several years now and is basically "why are people so gloomy when the economy is doing so well?" If you ask instead, "why are people so gloomy when the economy has all these problems, reduced economic security, stagnant real wages, rising health care costs, falling home values, rising college costs, rising food costs, loss of employer based retirement programs, rising energy costs, worries about the future, etc., etc.," there's really no mystery.
Update: See comments from Andrew Leonard and Richard Green.