Monday, June 4, 2012

Another Long Lonely Month Waiting for the Confidence Fairy...

I haven't really read the recent employment report---it was too discouraging.  But I was interested in this response.  And not just because the title is brilliant.  I was interested because of the flavor of magic the author believes in.

Paul Krugman makes fun of European Austerians' faith in the "confidence fairy", which seems to be the belief that somehow if they make enough sacrifices---or if they, the prosperous policy makers who have no personal risk to consider, make the poor and the old sacrifice enough---that international bankers will gain confidence, and will be willing to lend money at low rates to cover their government debt.   At least I guess that's what they think.

um....ok.  I have so many problems with this I don't know where to start.  It's not clear to me why an international banker would gain any confidence in them by watching them drive their economies into double dip recessions (England) or even real no-baloney depressions (Spain, Portugal, Greece).  But what puzzles me is this: why did they choose international bankers as their savior of choice?  Why do they think that confidence from those people in particular will save them, and cause an economic renaissance?

This author of the piece I linked to above has a different group he wants to reassure, or at least that's my impression from reading this piece.  He seems to believe that the U.S. economy is waiting breathlessly for the confidence of business investors to return, of CEOs of companies, who can hire people if only they believe the future is good.

Well, that's closer, I think.  It's true that businessmen are often  driven by their personal beliefs in a future they can't really predict with confidence, driven by what Keynes called "animal spirits", the urge to act even when the future can't be predicted, when you only have your own gut feeling to go on.  We're all driven by that, because for most of our lives our own feeling about the future really is all we have to go on.  There is a lot about the future that we can't predict in any rigorous way: we simply don't have and can't have the data we would need to make a forecast.  Who will win the Presidential election?  How about the election in 2016?  We can't have the information we need to predict that.  It just isn't available.

So I approve, mostly, of his choice.  At least it makes more sense to me than waiting for international bankers, who show no signs of being impressed by governments who beat themselves in a morality-driven budget-balancing frenzy.  But he sees these businessmen acquiring their confidence, or lack of confidence, by observing some pretty abstract events.  He sees them as all being driven by the kinds of events and concerns, and even the kinds of data, that fascinate economists:  by the economic conditions in China, and in Europe, by the slowdown in emerging markets, by the price of oil futures.  All of these matter, without any doubt.  But I don't think the local tire store or supermarket is driven to hire by events as distant as these.  Local businesses hire because they think they must hire someone to service expected local sales.  And big businesses, international businesses, don't hire large numbers of workers here, in the United States, to service sales in distant emerging markets: they hire workers in China or India to make the new product, and salespeople in the country where they expect to sell their products.  They don't hire workers in Spain to serve customers in Sri Lanka. 

That doesn't mean that the news has no impact on the mood of businessmen.  Of course there is.  We are all moved by the front pages.  And as I said, I like the choice of economic savior: business people certainly fit that role better than international bankers. 

But I'll stick with my faith in my own version of magical creatures.  I believe the economy will improve when potential customers, meaning ordinary people, have renewed confidence in their own futures.  When they have replenished their wealth, and driven down their debts, when their retirements seem more secure, and when their jobs seem more secure, they will return as customers.  And when they do, businesses will gain confidence, and will hire.  And when that happens, the economy will improve, and international bankers will gain confidence from that fact.  But it is the customers that start it all---not the bankers.

What makes my version of the magical confidence fairy, the version that thrives on the confidence of ordinary people, of potential customers, instead of on the confidence of international bankers, what makes that version better and more true? 

Well, because it's mine.  Because it's the confidence fairy I believe in. 

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