Peter Cooper — The Confidence Fairy and Formation of Demand Expectations Under Uncertainty

From a broadly Keynesian viewpoint, output is demand determined. This suggests that fiscal policy, by affecting demand, can affect output and employment. At the same time, however, many Keynesians emphasize fundamental uncertainty. Firms’ output decisions depend upon expectations of future demand, and these expectations must be formulated under conditions of uncertainty. It can be wondered how the efficacy of fiscal policy squares with the presence of uncertainty....

heteconomist
The Confidence Fairy and Formation of Demand Expectations Under Uncertainty
Peter Cooper

George Osborne — Mais Lecture - A New Economic Model

1. Confidence fairy
2. Reinhart & Rogoff
3. Inflation targeting
4. Fiscal sustainability

How did that work for you?

SayIt — Conservative Party Speeches
George Osborne: Mais Lecture - A New Economic Model

Feb. 24, 2010

ht 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

Alexander Mercouris — Don't Be Like the 'Fed': Russia's Central Bank Shouldn't Take Orders From the Financial Elite

What however is holding the Central Bank back is - in her own words - the following:

"What worries us quite seriously is that medium-term inflationary expectations, in particular those of the professional community, not only economic agents, but professionals, not anchored at a level even close to 4% to this target, which we have. And us there is a very serious task is to make it so that all believe that we a) want to reach it and b) will carry out such a policy, which will allow for reaching it”.

In plain language, what principally worries the Central Bank is not inflation, the rouble’s exchange rate, the savings rate, or the general state of the economy, but the Central Bank’s credibility - or lack of it - with the financial community (ie. bankers, financial analysts and traders) who doubt it is serious about its 4% inflation target.

In other words the Central Bank is keeping the interest rates high - and the economy in recession - so that it can gain the confidence of these people.

The reason there is now a crisis of confidence in Western Central Banks’ ability to manage the Western economy is because for far too long Western Central Banks did whatever the West’s financial community wanted.

The Russian Central Bank should learn this lesson and should not fall into the trap of doing the same thing.

If general economic conditions point to the need for a reduction in interest rates - which in Russia they do - then the Russian Central Bank should have the courage of its convictions and just do it, and not worry too much about what the financial community thinks.

That is the way to gain credibility, and to show to the financial community who is the master.

The Confidence Fairy is alive and well in Russia. So is neoliberalism.

Russia Insider Daily Headlines

Don't Be Like the 'Fed': Russia's Central Bank Shouldn't Take Orders From the Financial Elite
Alexander Mercouris

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

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

Robert Skidelsky — Messed-Up Macro

Economics is a science? Really?

Model, model, who's got the (right) model?

Project Syndicate
Messed-Up Macro
Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords
ht Brad DeLong

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

Dirk Ehnts — Steinbrück on Greece – it’s politics, not economics!

The drama of Greek debt is a political drama. The troika was invented during the crisis. Austerity was never a threat before the crisis happened and was imposed because the European Commission wanted it, not because it had to. These were political decisions, and they were not based on macroeconomics textbooks. Expansionary austerity and the confidence fairy where stories invented on the go, without proper theoretical foundations (and not mentioned in macroeconomics textbooks). It is about time to stop T.B.T.F. (too big to fail) and T.I.N.A. (there is no alternative) and rethink the whole episode 2008-2014. Learning from mistakes is hard, but it must happen.

econoblog 101
Steinbrück on Greece – it’s politics, not economics!
Dirk Ehnts | Berlin School for Economics and Law

Lawrence Delevingne — Germany: Our job is to strengthen Europe

A top German official has said the country supports Europe's efforts to kick start the region's economy -- including a quantitative easing (QE) program -- but that other countries have to sell reforms to their citizens. 

"The task for Germany now today is, through its own policies, structural reforms, its own investments, to support the EU and the Commission when it brings on to the market, so to speak, its stability package,"Sigmar Gabriel, vice-chancellor and federal minister of economic affairs and energy of Germany, said at the World Economic Forum Thursday in Davos, Switzerland.

"But every nation," he added, "has to have the courage to broach such structural reforms and speak clearly about them without making people afraid. This is difficult."

There could be significant political cost—such as losing elections—from such structural reforms, Gabriel said, but stressed there was no other choice.

"There is no alternative. The alternative is to simply prolonging the crisis and this situation becomes untenable for citizens," he said during a discussion about Europe's economy.

Then comes the delusional appeal to the confidence fairy.

"How can one give people the sufficient confidence to believe that they will benefit from...these structural reforms?" Gabriel added. 

"That is a difficult task for politicians to give such confidence to the electorate, so they can believe that their children will be better off. That is one of the major task of politicians and I think some have been quite successful."

Good luck with that.

CNBC Davos
Germany: Our job is to strengthen Europe
Lawrence Delevingne

Paul Krugman — The World According to the GOP

Krugman calls bullshit on the GOP for concern trolling by invoking myths for political gain.

Over at The Washington Post's Wonkblog, the reporter Lydia DePillis recently asked: "Remember when Republicans were worried about 'economic uncertainty'?" Actually, no, I don't. I remember when they claimed to be worried about economic uncertainty - but it was completely obvious even at the time that this was nothing but an attempt to put a new, quasi-academic gloss on the same old, same old.

What they really meant was that the economy will boom only once we get rid of the Islamic atheist Kenyan socialist and install someone who will be nice to rich people. They grabbed hold of some research that seemed, if you didn't read it carefully, to support their complaints, but there was never any question that they would drop the uncertainty thing the moment it became inconvenient in the pursuit of their real goals. And so they did.

It's a lot like the austerity debate, where it was obvious all along that all the carping on debt was really a way to go after the welfare state - a point demonstrated forcefully by the hostile reaction of people like the European Commissioner Olli Rehn when the French began reducing their deficit by raising taxes rather than slashing benefits.

The point is that there are a lot fewer economic arguments out there made in good faith than a naïve observer might think - and that's precisely because powerful forces are doing their best to hoodwink said naïve observers. So, goodbye "economic uncertainty." The truth is that nobody ever took it seriously.

Truthout  | Op-Ed
The World According to the GOP

Paul Krugman, Krugman & Co.

Krugman's conclusion. Some of these people are morons and some are either perverse or complicit in perversity.

Paul Krugman — Things Serious People Believe

On invoking the confidence fairy to justify debt reduction. Yes, it's Democratic VSP (very serious people), too.

Nothing new, but nice to hear coming from the bully pulpit.

The New York Times — The Conscience of a Liberal
Things Serious People Believe
Paul Krugman | Professor of Economics, Princeton University

Waiting for the Confidence Fairy

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