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Attack of the Confidence Men

“These days, debt-fueled government spending doesn’t increase confidence. It destroys it.” – David Brooks, July 6, New York Times

“Not since World War II has an economic recovery been so hobbled by poor confidence.” – Robert J. Samuelson, June 12, Newsweek

“I also think the confidence issue is key. Public debt is now one of the top national concerns. If we spend the next few years making deficits worse than they are now, the national mood will plummet, and business people will definitely not gain the certainty and predictability they are hungering for.” – David Brooks (again), July 7, NYTimes.com

Get ready to hear the dumbest arguments yet against effective measures to bolster a recovery, address the unemployment crisis and spur economic growth. The Confidence Men are on the loose.

These self-appointed Keepers of the Flame of Conventional Wisdom are spreading a certain European contagion, an irrational exuberance for austerity that’s been noted frequently by economist Paul Krugman:

But don’t worry: spending cuts may hurt, but the confidence fairy will take away the pain. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, the president of the European Central Bank, in a recent interview. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Krugman has been on quite a tear of late on these matters on his blog. See for example: Plan XVII For Europe, Arguments from Authority, and A Terrible Ugliness Is Born, among others.

Also on a tear, unfortunately, is the aforementioned European Central Bank president, Jean-Claude Trichet who comes at us again today from his alternate universe:

European Central Bank President Jean-Claude Trichet on Friday stepped up his warnings to governments to reduce their borrowing before they lose the confidence of electorates and financial markets.

“Many countries in the industrialized world have reached the limits of fiscal expansion,” Mr. Trichet told a central banking conference. “Fiscal authorities need to look beyond the current cyclical upturn. There is no alternative to that.”

The central bank president has repeatedly argued that persistent budget deficits undermine public confidence, causing more precautionary saving and unnecessarily weakening demand.

In Mr. Trichet’s mental universe we’re now in a “cyclical upturn”, but demand is being hampered by a lack of confidence. In the view of this cut-spending-reduce-deficits-throw-the-stimulus-into-reverse-now crowd, businesses will snap-to and unleash a torrent of job-expansion investments once they have imbibed the magic elixer of confidence. But they’re abstaining until government spending is cut, deficits are reduced, austerity reigns, and additional pain and suffering are imposed on the lower classes.

It’s like blackmail. But it’s bullshit. It’s all a confidence game, as Ezra Klein noted.

When Congress reconvenes next week we’ll undoubtedly be treated to a constant chorus by the likes of Republican Senators Mitch McConnell, Jon Kyl, Judd Gregg and John Cornyn et al. repeating the refrain that we can’t extend unemployment insurance and we can’t help states with Medicaid support, or anything else because government spending is increasing the deficit, and the deficit is undermining the recovery, keeping businesses from hiring more workers, and growing so rapidly there’s the threat of public debt default (the “we are Greece” line). The austerity caucus — the Confidence Men — will argue, quite incredibly with straight faces throughout, that only by making the “tough choices now” to cut spending for things like unemployment insurance, Medicaid and support for state and local governments can we “restore confidence” (blah, blah, blah).

The anti-spending, deficit-reduction push is not motivated by a real desire to restore economic growth. Nor is it driven by a real desire to reduce deficits. To the contrary — politically, the Republicans would prefer a faltering economy, thinking they will benefit at the polls in November if they can help steer the economy back into the ditch. And the austerity they promote would more likely only add to the deficits.

But let’s go back to the assertions that the deficit is undermining the recovery, keeping businesses from hiring more workers, and growing so rapidly there’s the threat of public debt default.

What’s undermining the recovery is a combination of key factors, starting with the persistence of depressed aggregate demand and high unemployment. Add to that a sluggish private sector and anemic jobs growth. Making matters worse is the simultaneous winding down of the 2009 Recovery Act stimulus, the obstruction of unemployment benefits and every other program to help workers struggling to get through the recession, and the stubborn lack of bold jobs policy initiatives from the
White House.

So what’s keeping businesses from expanding and hiring more people? Do you think corporate executives and business owners are actually sitting around saying, “Gee, I’d love to expand and hire more people, but the federal deficit is really crimping my confidence”? Please. As they say, it’s the economy, stupid. As Paul Krugman writes in his column today:

… there are widespread claims that fears about taxes, regulation and budget deficits are holding down business spending and blocking economic recovery.

How much truth is there to these claims? None. Business spending is indeed low, but no lower than one would have expected given widespread overcapacity and weak consumer spending. Business leaders are feeling unloved, but giving them a group hug won’t cure what ails the economy.

If we want stronger business spending, we need to give businesses a reason to spend. And to do that, the government needs to start doing more, not less, to promote overall economic recovery.

Exactly. What is it that causes businesses to invest and spend to expand and hire? First and foremost is increased demand for their goods and services, as well as the availability of affordable credit. But also, there needs to be competition for those goods and services, so that businesses are motivated by wanting to not get left behind. And lastly, there must be increased demand and competition for labor. It’s the depressed demand for goods and services as well as labor that is still stifling growth. And only robust, sustained growth will allow debt-to-GDP ratios and deficits to improve.

So, what of the assertion by the Confidence Men that current short-term deficits are causing some imminent threat of a U.S. debt crisis, or even default? While some of the weaker economies of smaller nations are experiencing problematic debt issues, the simple fact is that the U.S. is not. The market for U.S. Treasuries continues to be robust, even as yields remain markedly low. The benchmark 10-year rate has remained about 3 percent, which means the U.S. is readily able to borrow at very low interest.

So, if none of the economic assertions promoted by the Confidence Men hold any water, what might be said of their assertion that austerity-imposition and spending-reduction would at least have the benefit of producing some increased sense of business confidence? Well, not much:

French Business Confidence Declines on Budget Cuts

French business confidence declined for a third month in June on concern that budget cuts across Europe may slow consumer demand.

The Bank of France said today that the country’s economy will expanded about 0.4 percent in the second quarter, compared with a previous forecast of 0.5 percent.

The Confidence Men are engaged in a confidence game, pure and simple. They have no real interest in either spurring economic recovery or addressing fiscal deficits. What they do want to do is attack all the social safety-net programs, from unemployment insurance and Medicaid to food stamps, Medicare and Social Security, not to mention public education.

It’s a shameful sham.

Tags: austerity, Jobs, recovery, unemployment