Confidence

The word indicates an inner feeling, but sometimes it is best to parse it. It comes from “trust,” combined with “with,” thus trusting with or trusting X. It seems to me that the X is here the issue. We use the word in relationship to the inanimate ranges of reality of well. We’ll test a knot and say that we are confident that it will hold. But when it comes to complex situations that we cannot actually test, like we can test a knot or a beam, the presence of confidence or lack of it has everything to do with people, with agents. Public confidence in the economy—therefore motivating us to spend or to invest—is not produced by careful observation of a mechanical arrangement but comes from a general “feel,” as it were. And much of that feel comes from the news, the media—alongside talking to other people and observing what they do.

The New York Times and the Wall Street Journal both feature stories this morning that certainly shape public confidence. The NYT headline: HOUSE G.O.P. SETS A NEW OFFENSIVE ON OBAMA GOALS. The Journal’s: RANCOR IN WASHINGTON FANS PUBLIC DISAPPROVAL.

It’s really the same story, although the Times’ focus is on actual planned cuts in budget whereas the Journal concentrates on a Wall Street Journal/NBC News poll showing public disapproval of Congress—which has reached an all time high of 83 percent.  Obama’s approval rating was low too, 45 percent. The Founding Fathers would here have talked about the evils of faction. That last word comes from the Latin for “a making or doing” used ever since to mean a political party or a class of persons.

Uncertainty breeds lack of confidence and conflict breeds uncertainty. No. We cannot neatly isolate the political from the economic, the personal from the public. Nor can such things as attitude be put in place by Constitutional language. Yet the performance of a democracy absolutely demands that once an administration has been elected by the public, the political conflict that resulted in that outcome must be brought to a halt; unified action must follow. We now have a situation that, were it manifesting in a person, would make that person highly unreliable. He would no sooner start something than try to destroy it, say something then try to unsay it, promise something and then do the opposite. With such a “person” in charge of our country, can we be confident? Civil war comes in many different forms—acute and violent, insidious and undermining. We have the latter, Syria the former. In a forced choice, I’d rather have ours—but in a free choice I don’t want civil war at all.

The Restoration of Confidence

The restoration of confidence—based on just plain common sense—requires a clear diagnosis of what went wrong, a plan to implement corrections, and then a disciplined working of the plan. What doesn’t work is treating symptoms. And letting nature solve the problem is, in effect, to abdicate.

In our present situation the causes of our crisis are (1) failure to regulate the financial system so that a mortgage bubble could arise; (2) globalization which drained jobs from the domestic economy while flooding it with cheap goods; and (3) fighting expensive wars overseas while cutting the taxes that should have paid for them. Have I left out something basic? I don’t think so. There are all kinds of bad theories behind the wrong-headed decisions, but that’s another story. The worst of these is giving market forces free rein in the belief that they will invariably produce optimal results. Markets must be regulated—much as farmland must be cultivated to yield crops. Nature will not do it left to its own devices.

If we heard this diagnosis from the highest levels—and necessary changes proposed to correct the wrongs as soon as ever practicable—confidence would then return because all of these things are self-evident, common sense, and the public would immediately sense some comfort.

The solutions are very drastic regulation of the finance sector. This would include limiting speculation, prohibiting computer trading and all kinds of derivatives markets, mandating high reserve retentions in every kind of banking and insurance, including investment banking. The solutions are protecting domestic employment by consistently and rationally-framed tariffs. By “rationally-framed” I mean that goods or services imported from overseas should cost, after the tariff, the same as those manufactured or provided domestically. We need to raise taxes, and such tariffs would help. The solutions are to increase taxes so that what government spends it also pays for by current levels of taxation.

Now, having spelled it out, I’ve also made the difficulties clearly visible. Is such a program possible? Functionally? Yes. Will it take time? Yes. Will it be difficult? Yes. Will it mean withdrawing from various international compacts? To be sure. What it would require is vast public support—because it would be painful, here and there—but largely for the financially swollen fifth quintile of the population only.

Until I hear something like this articulated forthrightly by some credible segment of our leadership, the crisis of confidence will not be solved. It might eventually seep away as nature takes its course. But in the aftermath a much larger percentage of the population will have sunk beneath what we are still happily calling the middle class.

The Anatomy of Confidence

In a column in today’s NYT, columnist Gail Collins suggests that our leaders have finally discovered whom to blame for the lousy economy. It is the people—and their negative attitude. She cites Ben Bernanke saying that households are “exceptionally cautious,” IMF’s Christine Lagarde speaking of “a crisis in confidence,” and President Obama urging us to “shake off all the naysaying and the anxiety and the handwringing.”

All right—but Collins is actually over-reaching. In effect Bernanke is right. We are cautious. So is Lagarde; this is a crisis in confidence. The excerpt from the President’s speech is more of an interpretation, or a kind of characterization—but not of what people say. He is objecting to the media’s chatter-scribble instead. It would indeed be almost good news if the problem really was just attitude. But it is more than that. Bernanke’s characterization is the mildest. Lagarde’s is accurate. Confidence. That is the problem.

Confidence arises from two factors. One is an individual’s conviction of his or her own powers, knowledge, and capacities. The second comes from looking out at the environment. In the very best of times, a crisis of confidence would certainly erupt if we all woke up one fine morning and discovered one of our limbs paralyzed, one of our eyes gone blind, and our brain unable to produce three coherent sentences in sequence. That would be the failure of the first factor. But that’s never the case. Most of us wake up each morning fully functional and our capacities in place. Crises of confidence arise because the environment—the over against—has become unreliable.

Children are most frightened, indeed terrified, indeed go into hiding when their parent suddenly start acting crazy. And it need not be that bad. They just need to fight viciously and disagree about most things—and all the children hear, even through walls, is shouting, harsh thumping sounds, and the sound of breaking glass. Confidence is shaken when Dad packs his bags and leaves the house—or Mom does not come home from work but, when she does, late at night—seen through a cracked door from a dark bedroom—she is drunk and in the company of a grinning man they’ve never seen before.

Confidence fades when the house the couple agonized so long to buy, fearing the huge increase in expenses over rent, suddenly loses 40 percent of its value—but they still owe that lost 40 percent as part of a 30-year mortgage. Confidence ebbs when a colleague is clearing out her desk—and it seems that talk of layoffs is true after all—and your husband’s already home, having lost his, and you might be next.

To tell the people to e-mail, fax, telephone their Congressman, might be like telling the children to e-mail, fax, tweet, and face-book-comment Dad after he leaves the house to shack up with Floozy-Woo at work. Getting a fifty-dollar check from Grandma at such times does not restore the child’s lost confidence. The model train, at such times, is forgotten. The fifty bucks is nice—but last night, going to the toilet, you saw Mom at the kitchen table, all alone, and she was just shaking, shaking, shaking with sobs.

Naysaying, anxiety, handwringing? A negative attitude? Fixed with a little get-up-and-go, American competitiveness, the can-do spirit? If it was just attitude, folks, that would be nice. That would be fixable. But a real crisis of confidence is about as easy to fix, over-night, as the second layoff in a two-income household or the shatter of a family which, in effect, destroys, and not just for the child, the whole settled order of the world.

Stimulus v. Confidence

Under the Tax Relief Act of 2010, individuals get a 2 percent reduction in their Social Security contribution to payroll taxes. That contribution is 6. 2 percent of gross earnings. In 2011, the deduction is 4.2 percent. This applies to earnings up to and including $106,800. Thus a person earning $45,000 would have paid $2,790—but in 2011 pays only $1,890. This amounts to $900 or, taken at a monthly rate, $75 a month.

I bring this up because the administration is pushing for an extension of this tax cut to 2012—in the name of stimulus. The presumption is that people will rush out and spend that $75 a month, lift consumption, and therefore create jobs.

Now in my mind Stimulus does not stand alone, as it were. It is intimately associated with Confidence. Pushing for a stimulus measure without improving public confidence—indeed by eroding it in wave after wave of public events that signal doom ahead—has only one absolutely predictable consequence. In this case it means that the Social Security Trust Fund (so-called) is forgoing revenues. In today’s environment, the public is at least as likely (1) to pay down still staggering credit card debt or (2) put that $75 in savings against the possibility of losing the job, or the necessary second job.

The minor stimulus the administration is advocating is, it seems to me, way more than matched by the defunding of government that it cannot stem. Meanwhile confidence is low—and zigzagging like employment gains. Here the temporally near-term and the longer-range view of confidence:

The first shows the Consumer Confidence Index from mid-1997 to January 2011. This index is produced by the University of Michigan and published by the Conference Board. The straight line is the trend of confidence over a 14-year period. Notice, please, that the "leveling-off" after each drop has taken place at a lower level—which is that supports the downward trend.

The second, which I have from an April 2003 paper from the Regional Economist, a publication of the St. Louis Federal Reserve Bank (link), shows us much more history of confidence using the same series, going back to the 1960s and ending in 2003. What that chart shows is that we’ve had periods of very low confidence twice before, once in 1973-1974 and again in 1993 or thereabouts. Current levels, not shown on that chart, are matching those.

You can measure confidence in surveys, but the feel is the thing. The current level of confidence, it seems to me, is lower than any earlier periods’. That measly stimulus of $75 a month, or much less for many, does not automatically cause the kind of spending-frenzy the administration really wishes to achieve. What we’re thinking, here in the boonies, is that a trillion in cuts is bound to cause massive layoffs somewhere. And that we have unpaid FAA employees inspecting things for safety because Congress has denied them the dough.