Monday, October 25, 2010

Confidence vs. Certainty

The other day I said that I didn't think good economic policy revolved around creating confidence. I got a few questions on that, so I want to put a finer point on it.

The government should strive to achieve the greatest amount of certainty that it can while maintaining some flexibility to react to conditions in an unpredictable world. They should do this primarily in the areas over which they have explicit control, with federal taxes, spending, and regulatory regimes topping the list.

Efforts to create confidence too quickly devolve into the notion that the government will come to the rescue when times are tough. There may be times when government intervention is appropriate, but this sphere has a way of expanding seemingly without end.

Greenspan's confidence building contributed to the tech stock bubble and various federal interventions in housing, including Freddie and Fannie, played a role in the housing bubble and subsequent mess.

1 comment:

J. Strupp said...

So you feel that the government should play no part in supporting the fall in consumer and business confidence by allowing markets (and employment) to collapse under the weight of financial crisis because of past mistakes?

Given that confidence is directly related to employment (or the lack thereof), are we to assume that government should provide only transparency and fiscal restraint in times of economic crisis? Are we to assume to this limited response would translate into a confident U.S. and global economic outlook?

There are times when government's role in injecting confidence in the marketplace is amplified. This is one of those times. I'm sorry, but without our government's intervention over the last couple of years, I don't see any reason to believe that this world would have anything to be confident OR certain about.