Feeling confident? No, you are not. In the United States, the Conference Board's index of consumer confidence fell off a cliff four years ago, plumbed lows previously unknown in the history of the 44-year survey, and has stayed down for the count. Across the Atlantic, the Brits are glum. Confidence there is barely higher than it was in 2008, when the world's banking system came within inches of collapse. In Japan, business sentiment is lower than it was before the March earthquake; in Europe, consumer confidence has been weakening since the start of the year. Canadians are less sullen, but the Conference Board of Canada's consumer confidence index has fallen for five consecutive months.
Four years and counting of abysmal economic circumstances across most of the developed world (Canada partly excepted) is wearing people down. The Great Recession has been followed by the Tiny Recovery.
But something else is sapping confidence: accumulating evidence that those in power may not know how to get us out of this mess. Prior to the Great Recession, the traditional consensus view—from academy to chancellery—was that open, free-market economies could largely right themselves after a downturn. That hasn't happened. As businesses, households and governments have all cut back, the economy has slowed. Thrift is a virtue when practised by one household, but it squeezes like a vice when simultaneously undertaken by all sectors of the economy.
This is John Maynard Keynes's Paradox of Thrift: When everyone saves more and spends less in order to pay down debts, the economy slows. But that makes us collectively less wealthy, and less able to service those debts. Keynes believed that during a recession, a government deficit is the cure. When consumers and businesses cut back sharply, government has to step in as the spender of last resort. Otherwise, productive assets, notably millions of unemployed workers, could lie fallow for years. The Great Depression was a case of this; for Keynes's followers, the Great Recession is another.
Keynes argued that a recession was a mathematical problem of too little demand.
But he also saw it as a condition that is, in part, in our heads. It has to do with what he called our animal spirits. Neoclassical economists aren't comfortable with the idea that markets sometimes get things wrong, but Keynes put the fallible human at the centre of his theory. Sometimes our animal brain is gripped by irrational exuberance, bidding the price of houses or dot-com stocks up to absurd levels. After the bubble bursts, we may swing too far in the opposite direction, so fearful of loss that we won't spend or invest.
As a result of the Great Recession, the demand for ultra-safe assets has gone through the roof. Yields on the bonds of governments viewed as solid are near historic lows. Borrowers are willing to lend to the U.S., Germany, Japan, Britain and Canada at minuscule interest rates despite these countries' relatively high debt loads. Investors are snapping up 10-year U.S. bonds offering a measly 2% return.
For many non-Keynesian economists, this makes no sense. After U.S. tax revenues collapsed and the budget deficit soared, some analysts warned that "bond vigilantes" would swoop in and force Washington to pay higher interest rates. Instead, rattled investors want to hold greenbacks and U.S. government bonds—exactly as Keynes predicted.
Keynesian economists are now urging governments that can borrow cheaply to borrow and spend more in the short term before moving on to long-term deficit reduction. Even the normally tight-fisted International Monetary Fund recently called for as much.
But the idea hardly has unanimous support. A rift runs through the U.S. Congress, the Federal Reserve, the European Central Bank and university economics departments, which may be another reason why voters and consumers are so on edge. Imagine a patient who goes to the emergency room, suffering from lethargy and dizzy spells. A Keynesian doctor quickly concludes that his is a rare but textbook case of extremely low blood pressure. He writes a prescription. But a second physician rips the scrip from his hands. "Don't listen to this crank," doctor number 2 says. "You're suffering from my specialty: high blood pressure. We've got to slow you down, not speed you up."
Pretty soon the rest of the medical staff has joined in, and taken sides. Our patient wasn't expecting trained scientists to disagree so fundamentally. He stumbles home and returns to bed. He hopes for the best. But is he feeling confident? No. No, he is not.