One of Paul Krugman’s favorite targets is what he refers to as “the confidence fairy,” which is the belief that business investment and the market in general can turn on the expectations of investors as to future stability:
Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
Robert Higgs, who works with the same idea but probably more accurately identifies it as “regime uncertainty,” rebuffs Krugman for this claim :
Regime uncertainty, however, has a much more grounded basis. In on the topic, I have presented evidence derived from (1) a mass of testimony by investors, businessmen, and other contemporaries, (2) voluminous historical facts on the character of government actions that reasonable people had every reason to interpret as theatening the security of their private property rights, (3) variations in the structure of investment, especially as between short-term and longer-term projects, and (4) specific twists in the term-structure of returns on private corporate bonds, as well as other relevant evidence on the behavior of financial markets.
I’ll assume that Krugman is simply unfamiliar with Higgs’ work on the subject, because otherwise his assertion that there is no historical evidence behind the claim that markets care about future stability would start to seem a little bit dishonest. Some might protest that I’m caricaturing Krugman here, but consider this blog post from earlier today:
Lots of talk now about Apple’s cash hoard , which is actually kind of amazing: this is supposedly our cutting-edge technology company, and it apparently can’t find things it wants to invest in. Or more accurately, given its incredible profits, it can’t find enough things to do with all the money it makes.
So, I’ve had a mild-mannered dispute with Joe Stiglitz over whether individual income inequality is retarding recovery right now; let me say, however, that I think there’s a very good case that the redistribution of income away from labor to corporate profits is very likely a big factor. Here’s corporate profits as a share of GDP:
This strikes me as at least a little bit odd. Krugman never tires of pointing out –a position which, it seems, would depend on where you’re standing–and yet, the two best explanations he can come up with for increased “corporate hoarding” are as follows: (1) companies can’t find things they want to invest in, and (2) companies can’t find enough things to do with all the money they make.
These suggestions are, frankly, juvenile. But what’s worse is that Krugman leaves them at that, refusing to take his analysis a step further and ask why companies might not be able to find things they’d like to invest in. It seems to me that, in a time in which the economy is undergoing a heavily disputed period of recovery, a host of companies–especially tech giants who are struggling to remain at the top of their industry despite a lack of new and exciting ideas –might view “hoarding” cash as a relatively preferable alternative to heavy exposure to shaky financial markets. (It might be protested that fears of inflation should push companies to actually take greater risks in pursuit of yield, but that argument rests on the conceit that companies perceive inflation as a greater risk of loss than exposure to the market…if the opposite is true, however, then holding cash despite fear of inflation is totally logical).
I don’t know why Apple is hoarding cash, but this seems to be one immediately plausible explanation. In fact, it’s so immediately plausible, you might think that Krugman would have posted it in order to demonstrate why it isn’t true, and why his so-called “confidence fairy” still doesn’t exist.
Instead, it seems that Krugman can’t tell a confidence fairy even when it walks up and sets up shop right on his own blog.