Tuesday, November 1, 2011

The confidence game

Certain conservative politicians and members of the commentariat have indicated that the main problem with the U.S. economy is the lack of confidence.  They divine, by reading goat entrails, that the main obstacles to a recovery are uncertainty about taxes and the impact of what they call, pejoratively, Obamacare.  I find that idea very amusing.  Paul Krugman has labeled this the belief in the "Confidence Fairy."

One idea that is floating around is that uncertainty about taxes can make investors less willing to put their money into new business investment because they do not know how returns might be affected by future tax changes.  The bold solution to this is to extend the Bush tax cuts, that had been responsible for roughly 60% of the accumulated deficit between 2000 and 2009.  A problem with this idea is that if one really wanted to restore confidence in business that taxes are more or less stable, one would adopt a tax code that is fiscally sustainable, not one that runs up large deficits in good times and bad, alike.

A related idea to the tax uncertainty argument is that austerity, cutting government programs, is a good thing to do during the on-going depression.  After all, if the government cuts its costs now, it may not need to raise taxes at all or only very little later on.  There's only a minor problem with that idea.  Even if "establishing confidence" was reasonably effective, it would not be nearly as effective as expansionary fiscal and monetary policies.

Then there is the politically-driven attack on the health care reform championed by President Obama.  It is absolutely ridiculous that conservatives would blame a policy which will not be in full effect until 2014 for an under-performing economy today.  One could imagine that if businesses and individuals expected the health care reform would have costs which are being delayed until 2014, they might increase savings to some extent to pay for it.  Ultimately, though, there is no reason to believe that the proximate cause of the current depression, the collapse of an asset-price bubble in housing and the overhang of debt, is no longer a key factor in the depression now.

This evoking of confidence as a reason for inaction is deeply troubling and totally wrong-headed.  What business would decide to expand when its sales are way, way down, even if the taxes that it expects in the future are rather low?  Expansion of capacity is linked with a robustly performing economy, not one with huge untapped capacity to produce.  These thoughts of restoring confidence through making the Bush tax cuts permanent, cutting government spending and allowing more people to be uninsured does not help restore the economy to full employment.

There is still the same dynamic that needs to be solved.  Housing prices and household debt levels must be restored to sustainable levels.  Until that is done, the most successful policy will be a fiscal stimulus that invests in the future of American productivity.


  1. You have it exactly right, I believe.

  2. The real problem with Obamacare is that it is not, in fact, a radical reform of how health care is delivered in America. The low hanging fruit for real cost savings lies in the abolition of our numerous for profit private health care insurance companies and the endless thicket of obfuscation and denial built upon their various claims policies and procedures. Of course, there is an army of lobbyists and corporate campaign donors arrayed against any such undertaking.

  3. @Guam Kelly,
    Thank you for your comments. Unfortunately, I did not really address the Affordable Care Act's contents, but was focusing, instead, on the use of health care reform as a "source of uncertainty" which is blocking increased business investment. My main argument is that the chief obstacle to a return to full employment is depressed aggregate demand.

    Well, the easiest way of eliminating the problem you identify would appear to be adopting a Universal Single-Payer Health Care System. This has been proposed ever since 1949. It was part of Harry Truman's Fair Deal platform, but obviously was not enacted. I understand that Franklin D. Roosevelt proposed something similar in 1933, but intense opposition of "compulsory health insurance" from the American Medical Association apparently scuttled the effort (it would have been part of the Social Security Act).