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wundayatta's avatar

How would you rebuild people's confidence in the economy?

Asked by wundayatta (58525points) October 11th, 2011

When it comes down to it, if you believe John Maynard Keynes view of economics, the economy won’t go nowhere unless people believe it will. Keynes referred to this as “animal spirits.” It doesn’t matter if you cut taxes, or cut government spending or borrow and spend; if people don’t believe it will help, they won’t spend, and if they don’t spend, the economy won’t grow.

Just as a side note, Keynes believed that the Republican solution—reducing the size of government—reduces government spending, which makes the economy even smaller, thus further depressing “animal spirits.”

Anyway, if tax cuts don’t work, and cutting spending doesn’t work, and borrowing to spend doesn’t work, how can we, as a nation and as a world, get people to believe that things are improving? How can we build enough confidence that people will be willing to spend instead of sitting there, holding onto everything they’ve got for fear of being left with nothing if things get worse?

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14 Answers

lillycoyote's avatar

You create confidence the economy by creating an economy that people can have confidence in. It’s just that simple, there is no smoke and mirrors solution here. People see the money they have, they see the risk that they or those around them have when it comes to keeping or losing their jobs. That is the bottom line for most of us, I think. Create an economy where people have jobs they aren’t afraid of losing in the next year or so, or the next few years and they will start having confidence in the economy and start spending money.

wundayatta's avatar

@lillycoyote Of course. That’s obvious. The question that I am asking is how you do that. How do you create an economy that people have confidence in?

Qingu's avatar

That side note is pretty important!

The economy isn’t growing because people aren’t spending money. People aren’t spending money because they are (1) in debt, or (2) unemployed. Because people aren’t spending, businesses don’t think there will be demand for their products. Thus, businesses sit on their cash instead of hiring. Thus, people remain unemployed, which means less spending—and so on, a vicious cycle.

The obvious solution is for the government to hire a bunch of workers to do work on infrastructure—work that needs to be done at some point anyway.

I don’t actually think “confidence” has much of anything to do with it, at least not in the psychological sense. The data is out there. It says there’s massive unemployment, massive consumer debt, and a huge slump in demand for goods and services. Rational businesses look at this data and make the rational decision, “I guess we should sit on cash instead of hiring.”

wundayatta's avatar

@Qingu I am thinking of consumer confidence. People look at all the data you just described and they say to themselves “this economy is in the tank. I better save what little I have in case it stays like this a long time or even gets worse. No way I’m going to spend anything unless I absolutely have to.”

Simone_De_Beauvoir's avatar

Why, is it improving without our knowledge?

Ltryptophan's avatar

No taxes on anything for a year!

lillycoyote's avatar

@wundayatta And I’m saying there really is no other way to do it. There’s no smoke and mirrors option. You cannot create the illusion of a good economy. It either is or it isn’t. I just don’t think there is some other way to do it. People have will have confidence in an economy worthy of their confidence. If you’re looking for some trick, I don’t think there is one.

wundayatta's avatar

@lillycoyote NO, not a trick. A policy or action that would improve the economy in such a way that people would have confidence in it.

Although, now that I think about it, I’m not sure I agree with you. The state of the economy is a matter of perception. If people believe it is good, it will be good. If people are confident about the economy, it will start to do well. And if people are not confident, no amount of good news will make a difference.

lillycoyote's avatar

If you’re talking about “a policy or action that would improve the economy in such a way that people would have confidence in it” that is something else, not a trick. And yes, much of the economy is about perception, but on the ground, in the streets, if people are not working and having trouble finding work or they see that their jobs are in danger or that people around them are losing their jobs, I don’t think there is any policy that will change people’s perceptions of that reality in the day to day. The government can institute any policy it wants in an attempt to change peoples’ perceptions of economic realities, but nothing will change what peoples’ economic realities are. That is the bottom line that any policy maker has to deal with when making policy that attempts to improve peoples’s confidence in the economy, I think.

koanhead's avatar

Massive investment in infrastructure. The government need not operate at a profit nor even break even in the short term (for governments, the “short term” can be several decades depending on their credit rating.) Meanwhile, here in the US the Interstate highway system is decaying and would be inadequate to task even if it were in perfect condition. We need more rail capability, and no existing rail carrier is willing or able to pay to expand it. We need more electrical generation capacity, and the entire grid needs to be reworked so that the failure of a single generation plant or distribution station doesn’t result in cascading failures and widespread loss of service.
We need to decentralize our communications networks and eliminate single-points-of-failure there as well. We need to upgrade our networks to use modern technologies on every layer of the OSI model.
We have many more needs which I have not addressed here, which are unlikely to be addressed by private business due to a lack of short-term (a quarter or a year) profitability. The needs don’t go away because no-one can make a quick buck from them. The federal and state governments can, even now, borrow money on extremely favorable terms (and they wouldn’t need to borrow so much if they didn’t throw money down stupid holes).

Therefore our governments can and should spend (and tax, if necessary) to repair, replace, and upgrade necessary infrastructure as a top priority and desirable infrastructure as a second priority. There’s enough work needing to be done that no one willing to work should have trouble finding a job. Someone needs to start spending money, or no one will.

Props to @Qingu for saying it first, and better than I have.

Qingu's avatar

@wundayatta, well, I’ll speak from my own experience about consumer confidence. I’m living pretty frugally, no going out to restaurants, putting off purchases that I want, cooking beans. Why? Because my fiancee is unemployed. If she had a job, I would buy a TV, new headphones, a pie server, and go out a bunch more.

So I think what you mean by “consumer confidence” is directly tied to employment. For fully employed families who aren’t spending, I imagine the fear isn’t this vague “well the economy is bad, I’d better save money” — I think it’s probably more “well, the economy is bad, so one or both of us might lose our job, so I’d better save money…”

Also, I think we need to account for the huge mountain of debt that many consumers have built up over the years. Because that’s another huge reason why consumers aren’t spending—they’re paying off their debt, their mortgages (sometimes more than the value of their actual house), their student loans. That debt is a huge, huge drag on consumer spending. It’s one of the reasons why some economists have actually advocated aiming for higher inflation (inflation essentially reduces the value of debt).

wundayatta's avatar

@Qingu Yes, I’ve seen those arguments for pushing inflation higher. I wouldn’t be opposed to it. In fact, I’ve argued for it for a while now here on fluther. Nice to see a real economist who agrees with me.

I am now thinking about the role of default, and wondering if more bankruptcy might not be a good thing. Not at all sure about that, but it is another way to get out from under debt. If I were a banker, I would definitely be open to reducing payments for my borrowers. It seems to me that bankruptcies would be more costly than losing income. But for borrowers who are underwater and out of work, bankruptcy may be the best thing to do.

Qingu's avatar

I am not a real economist, if that’s who you were referring to… :)

I’ve never thought about bankruptcy like that… moral hazard might be problematic. Though that’s sort of similar to the rationale for a massive mortgage refinancing policy.

wundayatta's avatar

@Qingu No I was referring to the economist who is pushing increased inflation. I read about him or heard about him on the radio recently. I just can’t remember his name. AFIK, it’s not @Qingu, lol.

I’m not sure moral hazard would be any more of an issue than it is for Lehman Brothers, etc., so long as it is only for past borrowers, not future ones.

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