The confidence fairy seems to have turned into a confidence witch. One more victim of the crisis. But this one will not be missed. —Francesco Saraceno"Confidence" like "expectations" is a weasel word whose meaning depends on how it is interpreted. Few economists doubt that confidence is key in economic behavior, or that expectations are not based on confidence.
The issue is what confidence depends upon. Is it fiscal rectitude and wage-price flexibility as neoclassical economists suppose, or it is effective demand, as Keynes posited.
Imposing fiscal discipline, disciplining labor, and "structural reform" has been tried and not work. Cutting taxes on the wealthy to spur investment has not worked either. Fiscal stimulus has been tried and worked.
Want to improve business confidence so that firms will increase investment? Send customers to their counters. Government has the power to do this by offsetting non-government saving desire with an increase in aggregate net financial assets through deficits and targeted spending and transfers.
