The Effects of Uncertainty on Economic Outcomes — On the Economy

How does uncertainty affect the economy? The authors of an Economic Synopses essay examined this question, and their findings support the view that firms and households delay spending when uncertainty increases.

The essay was written by Laura E. Jackson, an assistant professor at Bentley University; Kevin L. Kliesen, a business economist and research officer at the St. Louis Fed; and Michael T. Owyang, an economist and assistant vice president at the St. Louis Fed....

As Keynes said.

FRBSL — On the Economy
The Effects of Uncertainty on Economic Outcomes

Myles Udland — A major psychological shift is occurring across markets and the economy

Markets and the economy are increasingly being characterized by one word: certainty.

This is likely to worry some investors and market watchers who see over-confidence in the future as a sign that things are about to change.

On Wednesday, the latest consumer sentiment survey from the University of Michigan indicated that while overall confidence in the economy is sitting right near a 13-year high, “what has changed recently is the degree of certainty with which consumers hold their economic expectations.”...

Yahoo Finance
A major psychological shift is occurring across markets and the economy
Myles Udland | Markets Reporter

Sandwichman — Marshall's Magic Confidence-Wand

Alfred Marshall quote.

EconoSpeak
Marshall's Magic Confidence-Wand
Sandwichman

Brad DeLong — Must-Read: David Lipton: The Key to Raising Business Investment: Keep Pushing the Accelerator

David Lipton: Some believe that the key to more business investment is less uncertainty about fiscal policy, regulation, and structural reforms. Some believe that it is providing better financing…. The facts suggest a much simpler answer: Business investment has been weak because economic activity has been weak. Ensuring a recovery in sales and sales prospects is the key.

A study we published in the April 2015 World Economic Outlook suggests that virtually all of the weakness in business investment in advanced economies since the crisis can be explained by the weakness in the economic environment… in line with the ‘accelerator effect,’ where investment responds to changes in output and sales….

WCEG — The Equitablog
Must-Read: David Lipton: The Key to Raising Business Investment: Keep Pushing the Accelerator
Brad DeLong

Lars P. Syll — The witch called ‘confidence fairy’

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.

Lars P. Syll’s Blog
The witch called ‘confidence fairy’
Lars P. Syll | Professor, Malmo University

Simon Wren-Lewis — Confidence as a political device

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

Brad DeLong — When and why might a “confidence” shock be contractionary? Karl Smith’s approach can bring insights

Sectoral balances.

WCEG — The Equitablog

When and why might a “confidence” shock be contractionary? Karl Smith’s approach can bring insights

Brad DeLong

Brian Romanchuk — Policymakers And The Confidence Fairy [Paul Krugman, Larry Summers, and Brad DeLong]

The trio of Paul Krugman, Larry Summers, and Brad DeLong once again are arguing about policy. And once again, they are showing the limitations of the blinkers that mainstream economics imposes upon its true believers. Larry Summers in this article defends the Fed Reserve rate hike on the grounds of the need of monetary policymakers to preserve "confidence" in the currency, which generated this response by Brad DeLong. Throughout the debate, the factoid that rate hikes improve investor confidence is assumed, without any reflection whether this is actually the case.…

Bond Economics
Policymakers And The Confidence Fairy
Brian Romanchuk

Brad DeLong — Larry Summers on How We Know More than We Write Down in Our Lowbrow (or Highbrow) Economic Models

Larry Summers on monsters under the bed.

LS: Paul asserts that a damaging confidence crisis in a liquidity trap country without large foreign debts is impossible, because if one developed the currency would depreciate, generating an export surge.

Paul is certainly correct in his model, but I doubt that he is in fact. Once account is taken of the impact of a currency collapse on consumers’ real incomes, on their expectations, and especially on the risk premium associated with domestic asset values, it is easy to understand how monetary and fiscal policymakers who lose confidence and trust see their real economies deteriorate, as Olivier Blanchard and his colleagues have recently demonstrated. Paul may be right that we have few examples of crises of this kind, but if so this is, perhaps, because central banks do not in general follow his precepts.

I do not think this is a pressing issue for the US right now. But the idea that policymakers should in general follow the model and not worry about considerations of market confidence seems to me as misguided as the view that they should be governed by market confidence to the exclusion of models.

WCEG — The Equitablog
(Early) Monday DeLong Smackdown: Larry Summers on How We Know More than We Write Down in Our Lowbrow (or Highbrow) Economic Models
Brad DeLong

Stephen G. Cecchetti and Kermit L. Schoenholtz — A Primer on Central Bank Independence

Central bank independence is controversial. It requires the delegation of powerful authority to a group of unelected officials. In a democracy, this anomaly naturally raises questions of legitimacy. It also raises fears of the concentration of power in the hands of a select few.…

Good starting point. They acknowledge the issue is a tradeoff between democracy and technocracy, and price stability and growth, liquidity and solvency.

Money & Banking
A Primer on Central Bank Independence

Stephen G. Cecchetti, Professor of International Economics at the Brandeis International Business School, and Kermit L. Schoenholtz is Professor of Management Practice in the Department of Economics of New York University’s Leonard N. Stern School of Business
ht Mark Thoma at Economist's View

Scott Adams — Blog Economics and Expectations (with a Trump point)

When I was studying economics in college, the most surprising thing I learned is that economics is what happens when you combine psychology with resources. I had assumed economics was more of a math/formula sort of discipline. There is plenty of that too, but the core of economics is human psychology.

Let’s talk about that.

The reason I say economics is psychology plus resources is that every transaction is based on human expectations. Businesses will invest heavily today if they believe customers are optimistic and likely to spend. If the mood is pessimism, and people are saving their pennies, those expectations stifle business investment.

I could go on for an hour about how your expectations are what creates value in this world. For example, you only make deals with people that you expect to perform. You only hire people you expect to do the job well. You only spend money if you expect to someday make more. You only buy a home when you expect real estate values to be strong in the future. And so on.

Economies run on expectations. And expectations are the result of our complex human psychology.…

Scott Adams' Blog
Economics and Expectations (with a Trump point)

Scott Adams, creator of Dilbert

Chris Dillow — Believing others

False confidence.

Stumbling and Mumbling
Believing others
Chris Dillow | Investors Chronicle

Was Tsipras "bought?" Plus, what is confidence and a civics lesson.

Lars P. Syll — British austerity delusion

Paul Krugman and Michal Kalecki quotes.

Lars P. Syll’s Blog
British austerity delusion
Lars P. Syll | Professor, Malmo University

Robert Skidelsky — Debating the Confidence Fairy

Contra Alberto Alesina.

Project Syndicate
Debating the Confidence Fairy
Robert Skidelsky | Professor Emeritus of Political Economy at Warwick University, a fellow of the British Academy in history and economics, and active member of the British House of Lords

Matias Vernengo — "The Question of Confidence" According to Marriner Eccles

Great quote from Marinner Eccles. It's a keeper.

Naked Keynesianism
"The Question of Confidence" According to Marriner Eccles
Matias Vernengo | Associate Professor of Economics, Bucknell University

Cameron Murray — Uncertainty is not what you think it is

Looking at risk and uncertainty through the lens of options theory.

Fresh economic thinking 

Uncertainty is not what you think it is
Cameron Murray (rumplestatskin)

Mike Whitney — The True State of the Economy

At the same time the corporations and banks are reporting record profits, Gallup surveys show that “trust in all three branches of the federal government remains on the lower end of what Gallup has measured historically” while “Americans’ trust in banks fell to an all-time low of 18% — lower than its level at the height of the global financial collapse.” (Gallup)

So, there is a tradeoff for all the loot Obama’s friends have been pilfering from working people, and that tradeoff is trust. Americans no longer have confidence in the government, the market or the justice system. Gradually, that lack of trust will cross-over into the economy as wary consumers set aside more of their earnings to protect themselves from the government-corporate-racketeer oligarchy. A slowdown in personal consumption will impact retail sales, durable goods, hiring and capital investment. It will douse those green shoots with motor oil and push the economy back into negative territory.

Counterpunch
The True State of the Economy
Mike Whitney

The "confidence fairy" isn't a total myth. Trust in government does count socially, politically and economically.

Obama has been a disaster that has been magnified by GOP obstructionism. Luckily, the obstructionism has at least prevented the Grand Bargain that Obama is seeking to cement his legacy as a Very Serious Person that cut entitlements and balanced the budget, in emulation of Bill Clinton's policy of triangulation.

Scott Fulwiller — Functional Finance and the Debt Ratio—Part I

This five part series will explore at length (warning!) and in detail (another warning—wonk alert!) the MMT perspective on the debt ratio and fiscal sustainability. While the approach suggests a macroeconomic policy mix and strategies for both fiscal and monetary policies that most neoclassical economists currently believe are unsustainable, ultimately the MMT preference for a significant role for fiscal policy in macroeconomic stabilization is shown to be consistent with traditional neoclassical views on fiscal sustainability.

This first part defines the correct measure of the national debt and then looks at the mathematics of debt service and the debt ratio.

New Economic Perspectives
Functional Finance and the Debt Ratio—Part I
Scott Fulwiller | James A. Leach Chair in Banking and Monetary Economics and an Associate Professor of Economics at Wartburg College

Bonnie Kavoussi — Glenn Hubbard, Romney Economic Adviser, Supports Discredited View That Austerity Grows The Economy

One of Mitt Romney's top economic advisers is promoting some questionable economic theories.

Glenn Hubbard, a top economic adviser for the Republican presidential nominee, wrote in an op-ed in the Financial Times on Wednesday that slashing government spending would stimulate the economy because it would boost investor confidence. The only problem: That notion is part of a largely discredited economic theory called expansionary austerity.

"Gradual fiscal consolidation may also be stimulative in the short run," Hubbard wrote.

Many respected economists agree that cutting government spending reduceseconomic growth, not only because government spending itself is part of the economy, but also because laid-off government workers don't have money to spend and killing government jobs can lead to job destruction in the private sector.

It's particularly ironic that Hubbard is advocating cutting government spending, considering his record as a top economic adviser for President George W. Bush. He approved tax cuts for the rich and the wars in Iraq and Afghanistan, which have cost the government trillions of dollars. He also turned a blind eye to the bloating of the risk-taking in the financial and housing sectors that contributed to the financial crisis and recession.

Read it at The Huffington Post
Glenn Hubbard, Romney Economic Adviser, Supports Discredited View That Austerity Grows The Economy
by Bonnie Kavoussi