Karma, the Confidence Fairy, and the Debt Spiral

Floyd Norris’ article in Friday’s New York Times, In Europe, a Marriage Shows Signs of Fraying, quotes Jens Weidman, president of the Bundesbank. “A widespread lack of trust in public finances weighs heavily on growth,” he said. “There is uncertainty regarding potential future tax increases, while funding costs are rising for private and public creditors alike.” In those circumstances, continued austerity “might inspire confidence and actually help the economy to grow.” Andrew Mellon, Herbert Hoover’s Treasury secretary, could not have said it better.

Paul Krugman has called it the confidence fairy, and follows up in his Friday column, Death of a Fairy Tale. As Professor Krugman puts it, “the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.”

I have referenced, in earlier posts, Jonathan Haidt’s What the Tea Partiers Really Want. In it he concludes that what conservatives such as Tea Partiers have is a moral passion, and what they want is not liberty, but karma. Defining karma simplistically, if you do the right thing, you should receive good fortune; do the wrong thing, and you should suffer.

If, as several commentators have noted, we tend to project our sense of how the family should manage onto the government and the world at large, we would believe that just as it is a moral good to manage our family’s finances to keep us out of debt, it is a moral good for governments to avoid debt as much as possible. There should be karma in this; if governments make the proper moral choice to avoid debt, good fortune should follow.

In the near term, as Professor Krugman notes, this has not worked out. Austerity seems to be leading to a debt spiral as economies shrink and see their debt loads increase. Maybe karma requires patience, and in the long-term, austerity will result in more stable economies. Or maybe our sense of karma is misplaced when it comes to global economics, maybe there is no confidence fairy, and maybe we’ll find out before it’s too late.