Confidence!!! [View all]

[cthulu2016]

Last edited Sat May 5, 2012, 01:03 PM - Edit history (1)

As regards the economy, the idea that austerity measures could trigger stagnation is incorrect... In fact, in these circumstances, everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Jean-Claude Trichet, 2010
[font color=red]President of the European Central Bank[/font color]
(A quote cited by Krugman: http://krugman.blogs.nytimes.com/2012/05/03/feel-the-confidence/)

Okay... stepping through this is instructive. This was the President of the ECB making a spectacularly dumb prediction that was refuted by facts within months. But this was not merely a poor prediction. It was a poor prediction derived from a ridiculous ideology that has nothing to do with how the world works.

The thesis (subscribed to by dumb reactionaries the world around, seemingly) is that government budget deficits decrease productive economic activity and government austerity produces higher levels of productive economic activity.

Since this is contradicted by most historical fact and theory we have to ask, what is the mechanism by which that it supposed to happen?

Confidence!!!

Now, confidence is indeed a key economic factor. If you are confident that widget sales will increase you will open another widget factory. And on the personal level, if you are confident that you will not be laid off, and that you can easily find a comparable job if you are, you are likelier to spend money.

But Trichet wasn't talking about the confidence we get from having guaranteed healthcare and a reliable income. He was talking about "confidence of households, firms and investors in the sustainability of public finances."

Household confidence in the sustainability of public finances? WTF'ingF???

Have you ever in your life made any "growth and job creation" economic decision based on the size of the budget deficit? Has anyone? "I was going to hire three new people, but then I heard on the news the budget deficit was up." "The bank called and approved our mortgage... but then I thought about the budget deficit and canceled the sale." "I was going to buy a Harry Potter DVD... but with this budget deficit how can I justify it?"

We do not make decisions like that.

When people make economic decisions based on the government's fiscal balance sheet they are making decisions based on their prediction of the deficit's effect on interest rates or taxes or some other effect, not on the existence of the deficit itself.

A high budget deficit could crowd out private borrowing or seem to threaten future inflation and thus make mortgage rates higher and thus dissuade someone from buying a house. That is true. That can happen.

But if the budget deficit does not cause high interest rates or high inflation (which is the case in the real world of today) then it is irrelevant to private planning. (Okay, it is vaguely conceivable that somebody might reason that they cannot afford a house because their taxes are sure to double soon to pay down the debt. Not very politically realistic, but I suppose somebody could think that.)

These deficit monkeys do not get that interest rates and inflation will indeed respond to deficits in a growing economy but have a very difficult time increasing in a depression-like environment. They ignore the fact that Japan intentionally ran insane deficits in hopes of creating inflation, with no success.

When Clinton balanced the budget it may well have fueled GDP and jobs (and the internet bubble). If Obama balanced the budget we would enter something worse than the great depression. Two different economic environments.

Thinking that economics can be as rigid as religious dogma, like when the Republican answer to all possible situations is tax cuts for the rich, is useless.

But these perma-deficit-hawks think, dogmatically, that government spending must lead to higher rates which then lead to decreased economic activity and then they reduce their (largely ideological) equation to:

Deficits = Reduced economic activity

Voila! And when you point out that government spending is economic activity, crickets. Um... it's that bad kind of economic activity.

I swear, some of these people would tell you that a deficit funded WPA type program would increase unemployment because deficits must be bad for employment, even when they pay for direct hiring of people!

It's like when I was arguing with an "Austrian" recently (Austrian economics, not nationality) and noted that we had exploded the money supply without increasing inflation, which made his views kind of... weak.

He replied that Austrians define inflation as increases in the money supply.

I asked whether it was useful to use the word inflation to describe declining prices. (Which was the case in Japan when they doubled their money supply in 8 years of deflation.)

Bigger money supply = inflation. Even if prices go down.

Bigger Deficits = Economic contraction. Even when bigger deficits actually lead to economic expansion.

So how much thinking that kind of equation saves?