Thursday, 9 January 2014

Robert Rubin’s confidence fairy drivel.

As Dean Baker put it, “In elite Washington circles, ignorance is a credential”. And Robert Rubin (former US Treasury Secretary) puts on a fine display of ignorance in this Financial Times article yesterday.
The article is entitled “Sound government finances will promote recovery”, which sounds good. But the reality is that whenever you see phrases “sound money” or “sound finances” you can be 95% sure (ironically) you’re dealing with an idiot. And the reasons, in this particular case, are as follows.
First, Rubin claims that “our unsound fiscal trajectory undermines business confidence”. That tired old idea is normally referred to as the “confidence fairy”. And I’ve not seen any empirical evidence to support it: that is survey after survey has been into the views of employers to see what influences their “confidence” and likelihood to invest, and “unsound fiscal trajectories” come very low on their list of priorities. Amazing as this may seem, what gives employers confidence is customers coming thru the door.
It’s pathetic that I need to spell out this blindingly obvious stuff, isn't it?
But to back his confidence fairy bullshit, Rubin claims that “Business leaders frequently cite our fiscal outlook as a deterrent to hiring and investment.” But he doesn’t actually cite any surveys to back the point. Well I can cite surveys that show Rubin is wrong. See:

The above surveys show that what really gives employers confidence (to repeat) is customers coming thru the door. Doh! (as Homer Simpson would say). Plus employers regard a host of other factors as being more important than Rubin’s “trajectories”.
Next, Rubin produces a great bit of false logic. He says “A sound fiscal trajectory is also a prerequisite for interest rates conducive to growth.” Well that sounds good, doesn’t it? The massed ranks of ignorant dick heads at the IMF will approve of that.
It is of course true to say that IF a deficit funded by borrowing results in increased interest rates, that will raise the cost of borrowing for the private sector, which would hit private sector borrowing and investment. Reason is that that rise in interest rates indicates that the private sector DOES NOT WANT an increased stock of government debt. Or in Modern Monetary Theory parlance, the private sector does not want more “private sector net financial assets” (PSNFA).
Put another way, if a deficit funded by borrowing DOES NOT raise interest rates, that’s an indication that the economy is in Keynes’s “paradox of thrift” territory. That is, the private sector is trying to save (bonds or money). I.e. the private sector wants more PSNFA.
Thus Rubin’s claim that “A sound fiscal trajectory (aka a deficit reduction) is also a prerequisite for interest rates conducive to growth” is nonsense. It’s a bit like saying that putting fuel in your car just before a car journey is a prerequisite to making a successful car journey. Putting fuel in your car is not a prerequisite if the fuel tank is already full and the journey is a short one.


P.S. ( 10th Jan 2013):  Brad DeLong also criticises Rubin's article.

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