Confidence Game

This, by Derek Thompson at The Atlantic --

The White House Finally Explains
Keynesian Economics

May 25 2010, 10:00 AM ET

Larry Summers gave an interesting speech yesterday defending and explaining the White House's economic policy at the Johns Hopkins School of Advanced International Studies (SAIS). His thesis was classic Keynesian economics: "Appropriate short-run expansionary budget policy can make an important contribution to establishing the confidence necessary for sound growth," Summers said. In other words, deficits are good, for now, because heavy public spending in downturns is still required to juice long-term growth. ...

Appropriate policy will establish "the confidence necessary for sound growth." As if there were really nothing wrong with the economy. Confidence is our only problem.

Oh, yeah, sure, confidence is a big deal, I don't deny it. Anything can create a panic, even a scary speech. But if the economy is really sound and healthy -- really, not just in political-speech fantasies -- then panics are unlikely, and if we have one it might just fizzle out on its own.

It's only when the economy is weak and listless for years and years and years that a panic or a hiccup can "ignite the final financial crisis."

Confidence is not the problem. Confidence is not the solution. Confidence follows conditions.

You can't restore the economy by restoring confidence. You can only restore confidence by restoring the economy.