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Winning the Confidence Game

NEW HAVEN – On April 2, the G-20 will hold a summit in London to discuss what we may hope will be an internationally coordinated plan to address the world economic crisis. But can such a plan really work?

The basic problem, of course, is confidence. People everywhere, consumers and investors alike, are canceling spending plans, because the world economy seems very risky right now. The same thing happened during the Great Depression of the 1930’s. A contemporary observer, Winthrop Case, explained it all in 1938: economic revival depended “on the willingness of individual and corporate buyers to make purchases that necessarily tie up their resources for a considerable length of time. For the individual, this implies confidence in the job, and in the end comes equally back to the confidence of industry leaders.” Unfortunately, confidence did not return until World War II ended the depression.

If the leaders meeting in London are to succeed where governments failed in the 1930’s, they must commit themselves to a fiscal target that is sufficient to restore full employment under normal credit conditions. They must also commit themselves to a credit target that will restore lending to normal. People will not spend normally unless they have both a job and normal access to credit. During the Great Depression, such targets were not used on a large enough scale, merely fueling public despair that stimulus policies would ever work.

The G-20 Summit should also be an occasion for affirming some basic principles. Confidence isn’t built up on the basis of spending or lending alone. People need to believe that the money represents something more lasting than stimulus measures, which may eventually end in failure. After all, the Great Depression did not end simply because of the massive stimulus of war-related expenditures. Why should World War II have produced any confidence in the future?