Paul Krugman whines incessantly about how conservatives are counting on the “confidence fairy” when they discuss pro-growth policies. (For a representative tirade, see here.) This is intended to make it sound like relying on the private sector is somehow an appeal to the dark arts.
Krugman needs a mirror. Keynesian “stimulus” is fundamentally a confidence game. It begins, as the nation is now painfully aware, by additional federal spending. But there it ends — no “multipliers,” no feedback — unless somehow the stimulus induces, tricks, seduces, pick-your-favorite-word households and businesses into additional spending. In the textbook telling of the stimulus fable, this spending happens automatically because households are assumed to be myopic spending automatons.
Real households are not. They aspire to provide college educations for their children, maintain their homes, and save for potential tough times, and they regularly revisit the tradeoff between spending money now and holding it for the future. A household has to be confident to give up a dollar now and be secure in its future. That explains the failure of Obama’s stimulus: A trillion dollars, but not a confidence fairy to be found.