Tuesday, February 03, 2009

On Confidence

A lack of confidence is one of the few causes of the current and all previous economic crises with which most economists agree. "Restore confidence," they argue and recovery will soon follow.

This leaves open the question of how confidence is "restored," and to what one refers when one uses the word, "confidence."

Is confidence that which is measured by consumer confidence surveys or is it something else?

The English word, "confidence" comes from the Latin confidentia, which translates literally as, "with faith," or more colloquially, "to trust fully." This definition begs the question, faith (or trust) in what? In the arena of economics, to be confident is to have faith (or trust) that one's actions will lead to the desired effects- a confident employee has faith that his employer will deliver the agreed upon wages and/or other benefits in trade for their labor, a confident investor has faith that his investment will generate the expected returns.

More generally, confidence in an economic sense is faith in the economic system, be it socialist, capitalist or other variant.

Under that head, confidence of economic participants will rise when the actions of the faithful are rewarded, and will fall when the actions of the faithful are not rewarded. If, for example, one sees others who labor faithfully get their promised rewards, which might include a pension for many years of service, one will come to believe that they too can be so rewarded.

Consumer confidence, perhaps confidence of the masses might be better, is, under this head, a widespread belief that the system works as promised.

Currently, consumers, i.e. the masses, are said to lack confidence. I agree, in a sense, but suggest that a different, and pernicious confidence is growing- the faith that the system works, not as promised, but as revealed. Idealism is being replaced by pragmatism, which makes restoring the beneficial confidence that much more difficult.

The system, as revealed, seems only to work for a small class of people, for whom the rewards are many, regardless of transgression.

A laborer who fails to pay taxes may well lose his home and perhaps be jailed while others who fail to pay get posts in the new Cabinet because they are allegedly the "best people for the job"- a sorry commentary on the quality of US administrative personnel.

A laborer who faithfully works for a business for many years may well find that, for no fault of his own, his promised pension will not be paid in full (or at all) while a CEO who runs a business into insolvency retires with millions.

A small business which fails to properly forecast future economic conditions is forced to liquidate and fire its employees while a large bank or other favored financial institution which fails to properly forecast future economic conditions is bailed out and gets to give its employees bonuses, or other perks.

While there may be hidden issues which rationalize such events to some, I suspect these rationalizations will fail to sway those whose trust in the system they were promised was broken. Indeed, the rationalizations may only serve to increase confidence in the system as revealed, which is a cynical system.

To the extent that the ideals of America are virtuous, which is to say that non-meritorious aristocracy and monopoly do not lead to the best economic outcomes, restoring the confidence of the increasingly pragmatic masses in those ideals will only happen when the facts on the ground match the ideals.

Trust repaid is trust increased and trust broken is trust decreased.

Sure it's obvious, but that doesn't mean it's easy.

I am asked to speak from time to time at the local Rotary Club and during my most recent visit I found, for the first time, a not-so-silent majority express the view that the system was predatory, not participatory. Restoring their confidence will not be easy.