Now to the additional point I really wanted to make. When people invoke the idea of confidence, other people (particularly economists) should be automatically suspicious. The reason is that it frequently allows those who represent the group whose confidence is being invoked to further their own self interest. The financial markets are represented by City or Wall Street economists, and you invariably see market confidence being invoked to support a policy position they have some economic or political interest in.
Bond market economists never saw a fiscal consolidation they did not like, so the saying goes, so of course market confidence is used to argue against fiscal expansion. Employers drum up the importance of maintaining their confidence whenever taxes on profits (or high incomes) are involved. As I argue in this paper, there is a generic reason why financial market economists play up the importance of market confidence, so they can act as high priests. (Did these same economists go on about the dangers of rising leverage when confidence really mattered, before the global financial crisis?)
The general lesson I would draw is this. If the economics point towards a conclusion, and people argue against it based on ‘confidence’, you should be very, very suspicious. You should ask where is the model (or at least a mutually consistent set of arguments), and where is the evidence that this model or set of arguments is applicable to this case? Policy makers who go with confidence based arguments that fail these tests because it accords with their instincts are, perhaps knowingly, following the political agenda of someone else.I generally agree with this based on facts on the ground. At the same time, Keynes emphasized the role of business confidence. Keynes held that business confidence was a function of effective demand and that a government's fiscal policy could address that potential loss of confidence by supplementing demand should effective demand contract owing to demand leakage resulting from increased liquidity preference.
There is a huge difference between inflation fighting, especially when there is little inflation in sight, "sound finance," monetary "discipline" and fiscal austerity, and bolstering effective demand by loosening the fiscal stance to address demand leakage to increased private or (inclusive) external saving desire, whether this is due to domestic private saving or a trade deficit.
Those who are monetarists of one sort or another hold that business confidence is chiefly a function of central banks' monetary policies. Fiscalists of whatever sort that follow Keyes, at least, connect business confidence with effective demand and see fiscal policy as the tool to address it, shifting the government's fiscal stance as appropriate to shifting non-government saving desire. For one thing, fiscal policy can be tightly targeted, whereas monetary policy is a shotgun approach.
Mainly Macro
Confidence as a political device
Simon Wren-Lewis | Professor of Economics, Oxford University
ht Random in the comments
6 comments:
What also is not mentioned is loose credit policy.
There was a paper by one of the conservative think thanks published in the late 70s that showed that even *given the same level of income and education and class* voters were far more likely to vote to the right if:
* They owned and used a car rather than using public transport.
* They owned shares rather than having a pension.
* They owned a house instead of renting.
That is even middle-upper class voters were more likely to vote left instead of right if they used public transport, had a pension, and rented, and most importantly even working class voters would vote for the right if they owned a car, some shares, and a house, no matter how thin such ownership was.
Just fancying themselves landlords with a sliver of equity in a modest 2-up-2-down made working class voters think that their interests were aligned with those of bosses and peers of the realm rather than the interests of other workers.
I think that the original push to therefore undermine public transport, pensions, rented housing came from Keith Joseph, but it could have been Nigel Lawson who clinched the deal, or Norman Tebbit, or Malcolm Rifkind.
Whoever was, that voting attitude study has become the right-wing bible in many countries, and in the UK Thatcher determinedly targeted enormous subsidies at car, share, and house ownership, while sabotaging public transport, the pensions system and the rented sector.
The stroke of genius was of course Right-to-Buy and the legal prohibition to use for house building the meager proceeds from selling rented council housing at well below market prices to future gratefully Tory voters.
Because of course pushing up house prices and pushing down wages may be break even for a voter - but what it does is mean they have a far greater % of income coming from property. People notice when being landlords nearly doubles their income.
This was the goal of the social engineering policy, because it was a *social* engineering policy, not a *political* engineering one.
The goal was not to make working class people change their *vote* to that for the party of another class, it was to make them change their *class identification* to that of the other class.
This arguably has succeeded *materially*. A pithy summary by the BBC on one important detail:
http://www.bbc.co.uk/news/business-19288208
"In 2001, the average price of a house was £121,769 and the average salary was £16,557, according to the National Housing Federation. A decade on, the typical price of a property is 94% higher at £236,518, while average wages are up 29% to £21,330"
Now, currently in the South-East a 230K house is a working class two-up/two-down terraces house, and 20K is a working class income, let's say in marketing categories C1-C2.
The figures above basically say that the average "working class" person in the South East got tax-free capital gains for £12,000 per year for 10 years, that is an extra 70% on top of their after-tax job income.
So if they look at their income, they are getting nearly 40% of their income from their property, for no effort whatsoever other than voting for politicians who use the word "aspiration" and dog-whistle that they will push for higher house prices and lower employment and wages.
Put it this way - fiscal policy has been effectively privatised by boosting property prices and then bailing out banks, Help to Buy etc to boost levels of *private* debt.
Many fail to see the distinction between the tory (lower case "t") and voting for the Conservative Party.
The sponsors of the Conservative Party are not completely interested in the electoral fortunes of the Conservative party, they pay a lot more attention to the popularity of toryism; to how vigorously incumbency is a strong political value.
In the US the two accelerations in debt creation happened a bit after 1980 (Reagan Involution) and 1995 (Contract on America). The only slow down in the debt bubble was when Democrats were in control, even if probably it was luck (despite Rubinomics). The two trend changes in debt creation also are largely reflected in stock market margin ratios, stock indices and P/E ratios, and later the same (margin ratios, indices and P/E) for real estate.
It looks as if soon after 1980 and even more so soon after 1995 the unofficial industrial policy of the USA was to redistribute a lot of income to some “key” constituencies via massive low-tax or tax-free capital gains generated by a debt bubble.
https://www.creditwritedowns.com/wp-content/uploads/2011/09/Total-Credit-Percent-of-GDP.png
The policy has been to increase the potential for capital gains, control the playing field and mask the stagnation in median income by deregulating financial services, offshoring jobs, crushing unions, allowing consumers to increase their indebtedness, and by criminalising the underclass in the drug war.
This has led to an asset-based economy wholly dependent on asset price gains to keep the middle class above water. When the asset prices collapse, the lack of savings, the debt overhang and the poor wage and employment prospects create a very negative situation.
That was the goal of "the ownership society" in the US.
How does this fit with the SWL belief you have to issue government bonds because 'confidence'?
Seems contradictory to me.
Random, interesting stuff but remember it's the government that keeps raising the conforming loan limits thus fomenting the rise in housing prices...
Matt yes but that is sanctioned by the *voters*
And if the voters don't care or are clueless that is not a cop out.
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