Shoring up confidence

Political leaders almost always have chosen to be optimistic about the economic outlook. It is well known that U.S. President Herbert Hoover said, “The fundamental business of the country … is on a sound and prosperous basis.” That October 1929 comment obviously was without merit. Then, in April, 1930, when a group of business leaders called on President Hoover for financial help, he replied that it was too late, as the economic troubles had ended.

On Aug. 1, 2007 U.S. Treasury Secretary Henry M. Paulson said that pricing of credit was hitting financial markets, but sub-prime mortgage fallout remained largely contained due to the strongest global economy in decades. That list goes on and on.

On the other hand, right before the British victory at the Battle of Agincourt, King Henry V predicted that, “It’s going to be extremely scary.” Of course, Winston Churchill’s famous 1940 speech warned that Britain faced only “Blood, sweat, toil, and tears.” The latter two speeches turned out to be forerunners of victory, while the flawed optimism were harbingers of disaster.

It has been risky for politicians to be overly confident. The famous economist, John Maynard Keynes, recognized that what he called “animal spirits” were essential for businesses to expand, but our government leaders nowadays present a false (optimistic) picture. Therefore, the public cannot be prepared for trouble and take the necessary steps to restore the economy. It must be recognized that it takes confidence for the public to place its money in banks, then for consumers to borrow money to buy houses or cars, based clearly on the assumption that they will be employed long enough to repay the loans.

Still, it does not help, in fact it is a hindrance, if politicians shore up confidence without proper justification. For too long people have been spending more than they earned and taken on debt they had no right to assume. When there is a gap between consumer sentiment and reality (like now), business activity normally will have to take time to catch up. A cloudy business outlook will entail governments and the public to take remedial steps, in a bad economic climate; no manager wants to be the fool who expands capacity or takes on big inventories unnecessarily.

Therefore, it turns out that unthinking confidence is inappropriate, as it will lead to serious mistakes by business and the public. However, when everyone is utterly despondent, as in the Great Depression in the 1930s, President Franklin Roosevelt revived hope in his first inaugural speech, declaring that, “The only thing to fear is fear itself.” People responded and soon started to place their money back in the banks that had been closed. In that era, it was appropriate to provide reassurance to the general public that had been so devastated by events.

At this time, however, our governments ought to refrain from spreading unfounded optimism that only would lead to further mis-steps. Facing the truth is the best course in the long run.


Bruce Whitestone