Peter Radford coins a great phrase. He’s responding to the idea that more confident stock and bond markets (not sure how that’s supposed to work at the same time, but I digress) would jumpstart the U.S. economy:
So. The path to success and to our final breakout from this lingering depression of ours is to engender confidence. That, apparently will solve everything.
No it won’t.
While I agree that confidence play a large role in shaping economic activity via the formulation of expectations and the encouragement of ‘animal spirits’, I am not sure that they are the critical element at play dragging us all down at present.
Ponder, for instance, on the way in which consumers are supposed to get back on track. According to Mallaby they need to see the stock and bond markets in glowing health. That will, apparently, cause them to cast aside their cares and go out on a shopping spree. Only a true child of the Romney era could ever think this. Us less educated types think that the lack of spending power may be a tad more important. And for the large majority of non-Romney people spending power flows from wages not stock or bond appreciation. It is the lack of wage growth for decades now that has caused the seizure of our economic motor, not the failure of stock prices to continue into orbit.
Now, I will grant that the middle class is too obsessed over house prices and that the crash in such prices has a lot to do with the enervation of our willingness to spend. But the reason we are so obsessed is precisely because homes are the largest assets most families own. Not stocks. Where the average family owns stock it is usually tied up in some form of retirement account and is managed by someone else. So whilst the financial media reports every little blip in stock prices, and I am sure many people take notice of them, when pinch comes to shove and a decision to buy something looming, it is cash in the bank that counts more than anything. And, as I have pointed out, that cash is most likely derived from wages.
This is, I am afraid, where the entire Romney generation gets off track. So enthralled are they by shareholder value, rational expectations, efficient markets, and market magic in general, that they entirely miss the point. They have done well. They do, in fact, have stock portfolios. They are concerned over stock prices. They worry about the things that Romney worries about. They have similar educations and world outlooks. They represent the failures of the Reagan/Bush delusion that free markets fix everything. And that for free markets to get on with this fixing of everything all we need is to inject a burst of confidence.
Cash helps too. In fact it dominates all else.
Like my Uncle Harry used to say, rich or poor it’s always good to have money. Noah Smith often talks about political bias in economics. It’s pretty clear there’s a class bias too.