Greg Mankiw gives this wise response to Robert Shiller's observation that confidence is the key to economic recovery:
I think a lot of economists would agree with that. The question is what
it would take to make people more confident. Bob thinks that confidence
would rise if the government borrowed more and spent more. Other
economists think that confidence would rise if the government committed
itself to, say, lower taxes on capital income. The sad truth is that we
economists don't know very much about what drives the animal spirits of
economic participants. Until we figure it out, it is best to be
suspicious of any policy whose benefits are supposed to work through
the amorphous channel of "confidence."
it would take to make people more confident. Bob thinks that confidence
would rise if the government borrowed more and spent more. Other
economists think that confidence would rise if the government committed
itself to, say, lower taxes on capital income. The sad truth is that we
economists don't know very much about what drives the animal spirits of
economic participants. Until we figure it out, it is best to be
suspicious of any policy whose benefits are supposed to work through
the amorphous channel of "confidence."
So where does that leave us? Skeptical and suspicious which are my main emotions in the current environment. But I do think the right question is to ask which policy would create more confidence. That is my main argument here.
