Thursday, June 9, 2011

The Confidence Fairy Moves Into the Lincoln Bedroom

The Confidence Fairy with the President's Council of Economic Advisors
The Economist:
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.


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.


In any case, it seems a sure thing that fiscal policy will be a net drag on the economy in coming quarters, and not an insignificant one either.

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