Sugar, or the Changing Nature of “Confidence” in the Administration’s Economic Policy

Oh dear god.  Sorry to start with two long block-quotes, but they are important and upsetting.  Zachary Goldfarb, Washington Post, Geithner Finds His Footing:

Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said.

Peter Orszag, Obama’s budget director, wanted the president to start proposing ways to bring spending in line with tax revenue.

Although Geithner was not as outspoken, he agreed with Orszag on the need to begin reining in the debt, according to current and former administration officials…
The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

“There was this move to exit fiscal stimulus a lot sooner than we should have, and we’ve been playing catch-up ever since,” Romer said in an interview.

Ryan Avent event goes to a meeting of administration economic policy advisors and leaves completely confused about the idea of “confidence” and has a must-read post on it, Feeling Confident?:

I asked [Goolsbee] whether his comments could be taken as indicating that the administration no longer felt fiscal stimulus could or should be used to support aggregate demand. Not at all, he replied, before talking more about the investment incentives and regulatory initiatives the White House has supported. These were, almost exclusively, supply-side policies. The administration’s business-support efforts look like useful steps to me, but they’re clearly not designed to provide a direct boost to aggregate demand…

The comments from Gene Sperling, Director of the National Economic Council and a key member of the team negotiating an agreement on an increase in the debt ceiling, were clearer still. The White House believes, he said, that deficit-cutting is an important component (the emphasis was his) of a growth strategy. And he repeatedly said that deficit-reduction was crucial in generating economic confidence. Confidence—he repeated this word many times….

At the same time, he said it is plain that a deal with the Republicans will involve a “bipartisan downpayment”. There will be short-term cuts, despite warnings from Ben Bernanke, Christina Romer, and many others.

I struggle to understand the logic. Britain counted on “confidence” to lift the economy amid austerity and has been sorely disappointed, despite an accommodative central bank. The literature on expansionary austerity suggests that it’s not an impossibility, but that it nearly always occurs in countries where high debt levels have produced high interest rates. America simply can’t benefit from the interest rate impact of austerity; its interest rates have nowhere to go but up.

So there appears to be a key switch sometime in the past 18 months in what is motivating neoliberals to address the long-term deficit and in the work that “confidence” needs to do, and I think Geithner’s rise in the administration can help explain it.

Two Deficits

I try to keep up with the various conceptual apparatuses different political agents use to understand what is wrong with the economy and how to get it to work better. In the neoliberal space there tends to be a “two deficits” debate – we need a much larger short-term deficit while we also bring down the long-term deficit.

Now why do we have to worry about the second, long-term deficit in the “two deficits” scenario?  My understanding of the neoliberal landscape was that it was to convince the bond market that further stimulus would be temporary, thus allowing a larger short-term stimulus to drive down unemployment without freaking out the bond market.

Noam Schieber had a great New Republic article explaining the “two deficits” debate in the administration from December 2009, noting: “Take, for example, the fact that spending more money now could actually raise long-term rates, thereby offsetting its stimulative effect. ‘The reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs,’ says one senior administration official. On paper, the way to deal with this is to spend now while pledging to cut later on, so as to persuade the bond market that the infusion is temporary.”

Neoliberals, as far as I understood them, care about reforming the long-term deficits not as an end in-and-of-themselves, regardless of the waste and potential for more optimal spending, but as a means to increase a short-term stimulus without panicing the markets.  You can doubt that a second stimulus would panic the bond market (I do), but the logic makes sense.

These two articles above, particularly Avent’s, show that there was a transition, where the long-term deficit reduction has becomes its own goal.

This New Approach

Notice the change in what the concept of “confidence” is doing in each.  The idea of the first “two deficits” approach is predicated on not upsetting the bond markets while the administration tries to get to full employment, because upsetting the bond market could put us right back at square one. If confidence drops while increasing aggregate demand the stimulative effort will be compromised.  We need to keep confidence in check.

This new idea is that making the bond market happy in-and-of-itself will produce prosperity and full employment through increasing confidence. The major drag on the economy isn’t low aggregate demand but confidence. Now the assumption isn’t that we have to keep the bond markets as happy as they were but instead make them much happier, which will then increase investments and spending through this increase in confidence.  Hence long-term spending cuts, lots of gimmies to incumbents in supply-side investments and other things powerful interests love but don’t necessarily make demand-based economic sense.

I simply don’t see any evidence of why, or even how, this would work. What are the arguments that confidence is the major check on the economy?  I understood the “two deficit” argument (though I disagreed with it), but this new approach is just substituting in the interests of bondholders for the entire economy.  If a very-polite version of expansion austerity is guiding the administration’s thought then this is even more of a disaster than these stories convey.

And this is where the administration’s “keep the financial markets going and confident at all costs” approach to the financial crisis, ranging from PPIP to not investigating mortgage-servicing fraud, takes over for general economic policy.  And that original approach was pioneered by Geithner, who is now apparently running the economic show.

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29 Responses to Sugar, or the Changing Nature of “Confidence” in the Administration’s Economic Policy

  1. foosion says:

    Businesses lack confidence that anyone will buy their products if they produce more. That’s the only confidence problem we’re facing. The only way to give them that confidence is for them to see more demand for their products and services.

    10 year treasuries are below 3%. Corporations and banks are sitting on massive amounts of cash. The problem isn’t a lack of confidence in financial markets.

    Those who fail to remember the lessons of 1937 are destined to repeat them. Our only hope is that we’re playing out FDR / Morgenthau, not Hoover / Mellon.

  2. JW Mason says:

    If I were a defender of the administration, I would be pointing to the PT government in Brazil as a successful example of this kind of pivot. Lula was criticized from the Left in exactly the terms you’re using here: They went from talking about high interest rates and fiscal surpluses as a necessary step to calm the markets before moving toward a more expansionary development strategy, to talking about austerity as a goal in itself. Emir Sader in the NLR:

    The Lula government initially argued that, due to the ‘accursed legacy’ of Cardoso, it would not be able to change course immediately on the economy. A doctor by training, Finance Minister Palocci preferred the metaphors of his original profession: ‘you don’t change the treatment during the illness’. What was required was an economic policy of transition, in order to gain the ‘confidence of the market’ and attract capital; interest rates could then gradually be lowered, and development would resume. …

    [But after taking office,] the Lula administration moved from initial suggestions that it was adopting a transitional policy to the assumption, by its second year, that the present economic course would be permanent. Vice was turned into virtue. … Despite all evidence to the contrary—and the admissions of his own finance minister—Lula insisted that ‘we are not continuing the policies of the previous government . . . we are rebuilding the economy, strengthening institutions and, above all, gaining credibility in the country and abroad.’ He emphasized the importance to economic growth of Brazilians ‘recovering their self-esteem’…

    I’ don’t think this is particualrly convincing — the US isn’t Brazil, obviously; and even in Brazil, there was space for a better alternative. Still, the PT record doesn’t look bad in retrospect. And it’s interesting how close the parallel is between these debates, including the invocation of a nubulous confidence or “credibility”.

    Incidentally, do you get the sense that the “confidence” Avent was hearing about was of bond markets specifically, As opposed to the idea that plans to reduce future deficits will boost investment demand?

  3. Altoid says:

    Whose article is, Kuttner’s, that talks about this in terms of debt overhang, the interest of creditors, as the ghost of the past holding us back, while everybody else needs the future? Sounds like Geithner is our own economic Charon, ready with the formaldehyde.

    Nothing’s going to happen until some institutional provision is made for eating the bad debts, period. It’s wrong both morally and financially to insist that individuals, as financial entities, have to absorb them after having already, as taxpayers, fronted the money to save the banks’ solvency in the emergency. Monstrous. I’m getting to the point where I wonder about the wisdom of mobilizing to destroy Naziism and then fighting the long Cold War at great human and material cost only to end up slaves to finance capitalism. Is that what we did it for? Really?

  4. JW Mason says:

    I’m not really liking the debt-as-ghost-of-the past thing that’s going around the left econosphere. it’s kind of poetic, and kind of true — you can find similar language in Keynes. But creditors are a specific group of people, who exercise political power through specific institutions. We need probably a bit less poetic language on why austerity is bad for everyone, and a bit more clarity on who’s on which side.

  5. winstongator says:

    What happens when you don’t take your full course of antibiotics? You get sick again. And the half-taking of antibiotics allows antibiotic resistant strains of disease to form. The analogy to antibiotics has more than one line to go down. Antibiotics aren’t without side-effects.

  6. Anchard says:

    I think JW asks the central question about confidence – whose is it that we’re supposedly so concerned about? To some it’s from the bond market, while to others it’s from businesses looking for FDI opportunities, and in other cases (Asia 97/98 comes to mind) it’s the currency markets. I’d say each of those constituencies arguably has overlapping but still somewhat distinct preferences. That’s all assuming the intention is to appeal to foreign capital, as in the case of Brazil. Here in the States it seems to mean some vague combination of appeasing global bond investors (never mind that they have already bid the 10-yr yield below 3.00) and US businesses sitting on cash and not hiring. How the environment could possibly be any better than simultaneous record profits and the complete lack of wage pressure is beyond me, but oh well.

    The whole concept of confidence is so vague and so protean in its application that it just seems to be an intellectually lazy way of justifying appeasing investment capital, however constituted. It’s hard to imagine that we’ll ever know exactly what it actually means, though it seems to gain credibility every time it is repeated.

  7. PeakVT says:

    Speaking of deficits, whatever happened to the “twin deficits”? Has (E-M) been banished from polite discussion?

  8. “Confidence” as in “confidence game.” See The Encyclopedia of Scams on “The Big Store”. This post is taking seriously what is, in essence, a con man’s patter to the marks.

  9. Altoid says:

    Let’s look at this from another point of view. We’re told that the confidence fairy (to borrow from Krugman) is what we need. That’s a kind of magic. Do we know what makes her take wing? And when she does, how will we know? Won’t we know because there’ll be money available for investing in plant and equipment, in training and hiring employees, etc, and that identifiable people will put it to use buying plant and equipment and training and hiring people? What other sign do we have?

    Well I’m not an economist but I seem to see reports that corporate America is sitting on a lot of cash right now. I also see that there’s so much money out there that our “insolvent” government can happily borrow unlimited amounts at 3%, for all practical purposes.

    And when we ask business people, who can borrow cheaper than I would be able to for a house and don’t even need to because they have the cash already, what fairy dust they lack, what do they say? A market, is what I’ve seen most often. But that isn’t the talk we get from anybody in a position of policy authority.

    My problem with “confidence” is that it’s a mystification that intermediates between what policymakers do and what the business world does, and it’s defined in such a way that the business world can never lose. (Yes, the business world is made up of many parts with discrete interests; however that really doesn’t matter much for these purposes.)

    Hence my astonishment and particular disappointment when Goolsbee failed on Sunday to say something like, “we’ve made huge strides in creating the conditions that our corporate citizens have told us they need in order to resume hiring and expanding production. We very much look forward to seeing them follow through on their promises to us and to the American people.”

    All I really want to see is some very simple talk about how money circulates from hand to hand and that’s where our jobs come from. I don’t see it anywhere. Since nobody says it, the public doesn’t even think about it. If they ever knew, it’s forgotten. Policy-makers don’t even think or talk about it among themselves unless they’re named Romer. If *they* ever knew, it’s forgotten. People can basically pay attention only to what somebody says, and what we’re all being told, it seems, is a fairy tale about some intermediary pixie dust.

    I have to stop now.

  10. jult52 says:

    Altoid – It’s a good question. I think the lack of confidence is on the demand side which is among several factors making companies unwilling to invest in US facilities & staff.

    Keep in mind that Japan had a very aggressive fiscal policy for years and aggregate demand has not benefitted from this, as I’m sure you’re aware.

    • acharn says:

      The curious think is that the central bank of Japan seems to have an inflation goal of 0%. Whenever their deflation has eased and the inflation rate has come back up to 0%, the CBJ has slammed on the brakes. Here in the U.S., the Fed appears to have an inflation goal of something less than 2%, which is ridiculous historically. The loudest voices from the Fed seem to be terrified of the specter of inflation of 2% or more. As Krugman has pointed out, current economic policies are entirely oriented toward making bond holders happy.

      • JW Mason says:

        I might write something about this at some point, but here’s my prediction: over the next few years, we will hear an increasing range of arguments that deflation is a good thing.

        Wherever inflation is currently, rentiers would like it to be a bit lower. The arguments adjust.

  11. JW Mason says:

    Keep in mind that Japan had a very aggressive fiscal policy

    No it didn’t.

  12. lawlines says:

    This is a disaster if you’re right.

  13. Dan Kervick says:

    If people promote hysterical, data-deprived theories about hyperinflation, public sector default, invisible inflation, the evils of modern fiat monetary systems, and the country being “broke”, then there is no doubt that confidence will suffer to the extent these theories get traction and are believed.

    It looks like the president’s team has concluded that the proper response to conservative fear-mongers is to appease them, and to try to rebuild that elusive confidence by accepting the basis outlines of the hysterics’ theories, and offering a solution to the pseudo-problems they promote.

    We should have paid more attention during the campaign when Obama let it slip that he believed there to be a Social Security “crisis.” Obama seems to have been a Peterson acolyte and Evan Bayh Democrat from way back. And personally, I mistakenly concluded during the campaign that when Obama expressed admiration for Reagan, he only meant to express admiration for Reagan’s political skills and communication abilities. But I now think Obama thinks Reagan was right about the economy as well. Like Bayh, Obama is a self-hating Democrat.

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  17. whispersd says:

    Geithner is a rich, arrogant dummy.

    He’s not alone.

  18. pjcamp says:

    You don’t need evidence. You simply need, like Geithner, to be plugged into Wall Street.

    Then you’ll be amazed at how fast your personal economic interests evolve into evidence.

  19. Nameless Bob says:

    “Con man” is short for “Confidence Man”. The crook gains your confidence before fleecing you,.

  20. Stowe Boyd says:

    Paul Krugman has been writing about the ‘confidence fairies’ for months. Just this week he wrote at the NY Times:
    “But the White House did not have to concede the economic argument the way it has — especially when the confidence-fairy, invisible-bond-vigilante believers have been proved utterly wrong. I mean, how could you have a clearer test of liquidity preference versus loanable funds than having the US government borrow almost $3 trillion with zero, absolutely no, effect on interest rates?

    And yet the WH buys into the doctrine that failed.”

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