The real confidence fairy

Jim Huffman Dean Emeritus, Lewis & Clark Law School
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About a week ago, New York Times columnist Paul Krugman pronounced April “the month the confidence fairy died.” The confidence fairy is the idea that economic revival will come when people have confidence that regulations will be predictable, taxes low and stable, and government budgets balanced. “The good news,” wrote Krugman, “is that many influential people are finally admitting that the confidence fairy was a myth.”

Krugman is confident, as always, in his view. For the past two years, he says, politicians and pundits in Europe and America “have been in thrall to a destructive economic doctrine.” “According to this doctrine,” writes the Nobel laureate economist, “governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.”

Even the occasional reader of The Times opinion pages will know that Krugman has been consistent in his view that American government’s failure has been in spending too little to stimulate the economy. More spending, he has said in almost every column he pens, is what is needed.

Despite the fact that “the failure of austerity policies to deliver as promised has long been obvious,” Krugman wrote last week, European governments, and to an alarming extent American governments, have pressed ahead with budget cuts. And the bad news, says Krugman, is there is little sign these governments have seen the light and truth of his confident view. They adhere to “zombie economic policies … that should have been killed by the evidence.”

What is the evidence, and what leads Krugman to conclude that the confidence fairy is dead? Well, the Dutch and French governments, and maybe the Wisconsin government, are about to fall in the face of popular opposition to austerity. Thus, the evidence that austerity is a failed policy and, therefore, more and more spending would be good policy, is that the beneficiaries of spending (largely the public-sector workers) may have the political power to topple some prominent governments.

But my reason for writing this article is not really to challenge Krugman’s economic theories so much as to challenge his supreme confidence in those theories.

As it happened, David Brooks had a column on the opposite side of the same page as the Krugman piece referenced above. Contrary to Krugman’s claim that all the textbooks agree, Brooks observed that there are “[m]any esteemed and/or Nobel Prize-winning economists” on both sides of the stimulus debate. “The economists who supported the stimulus now argue the economy would have been worse off without it,” notes Brooks, while “[t]hose who opposed it argue that the results have been meager. It’s hard to think of anybody whose mind has been changed by what happened.”

Brooks does not take sides. Rather his central point is that none of the economists on either side of the debate really know what they are talking about, or at least they make far stronger claims than their understanding warrants.

Brooks notes that theories on both sides of the debate are based on “model-building [that] hasn’t … helped us get better at understanding the problem.” “[N]o model can capture enough of the world’s complexity to yield definitive conclusions or make nonobvious predictions.”

“Hello,” as my teenage daughter invariably says when confronted with profound statements of the obvious. We, including our growing corps of Nobel laureate economists, do not have the kind of conclusive understanding of macro-economic forces and events claimed by Krugman, or by equally confident economists at the opposite end of the spending-austerity spectrum. How could we? The relevant variables are in the thousands and the actors in the billions.

Of course we should not throw up our hands in despair over ever understanding macro-economic forces. We do know a few things, and Brooks suggests we could know more if economists relied less on models and more on controlled experiments. But in the meantime, a little humility is in order.

It is commonplace today to blame much of our economic malaise on the partisanship and stalemate in Congress. Perhaps members of Congress would be less partisan and better informed if their economic advisers were more honest about what they don’t really understand.

Jim Huffman is the dean emeritus of Lewis & Clark Law School, the co-founder of Northwest Free Press and a member of the Hoover Institution’s De Nault Task Force on Property Rights, Freedom and Prosperity.