How much does consumer confidence matter?
A lot, you would think, if you listened to Washington or watched the news each week. The takeaway is that the consumer is an infant tyrant who must be jollied by politicians. With Washington's cash in hand, that consumer will then spend, leading us all to recovery.
This confidence in confidence derives partly from the established status of two confidence indexes, that of the University of Michigan and the Conference Board.
The confidence emphasis also comes from the economist John Maynard Keynes. Keynes wrote that market players act suddenly and not always rationally; sometimes, all it takes to restore confidence is new spending money. To Keynes, the market depended on "animal spirits - a spontaneous urge to action rather than inaction."
Most of us sense that there's more to revival than sudden desires for phones or cars, that the consumer isn't always a mindless mall rat. Rational caution may be beneficial, tax breaks aimed at stimulating consumption, perverse.
"There is something inherently odd in telling people who have no money right now to shop," says Paola Sapienza of Northwestern University's Kellogg School. The emphasis on spending obscures other forces in the business cycle, like credit. The freeze in credit endured the warm oceans of cash that made this past winter disconcerting.
Now Sapienza and Luigi Zingales of the University of Chicago are putting forward a new meter to join the old. Instead of measuring Americans' confidence, this meter tries to capture trust.
The Chicago Booth/Kellogg School Financial Trust Index, launched this January and updated for March, asks more than 1,000 households how much they trust the big institutions or people that affect economic life - banks, the equities market, the government, stock brokers. Grades range from 1, for "I do not trust the institution" at all, through 5, for "I trust the institution completely."
While Sapienza and Zingales do use the word "confidence" at times in their poll, trust is their big theme. And trust is different from confidence because it is not instant or capricious--trust is built over time--and therefore relates more to contracts and credit. "Credit is suspicion asleep," goes the old saying.
The Financial Trust Index gives a mixed picture of the first part of 2009. The good news is that trust in the stock market has risen. Those polled in December 2008 rated their trust for the market at 2.13; that figure was up to 2.18 last month. This is a small change, but at least the right direction. Trust for the government, and by association for another Chicagoan, President Barack Obama, is likewise up slightly.
Still, the same Chicago trust-o-meter carries some negative messages. In December the pollsters asked: "Have the government interventions in financial markets over the last three months made you more or less confident in investment in the stock market?"
A full 80 percent replied "less," an annihilating mark for the performance of George W. Bush, then-Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. Asked a similar question last month, 67 percent replied "less confident."
Even a majority of Democrats, 61 percent, reported being less confident (compared with 79 percent in December). You would think the shift would have been more dramatic. This suggests that the early work of Obama and Treasury Secretary Timothy Geithner failed to persuade even their political supporters to invest - or, perhaps, that the new administration's work turned off significant numbers of political allies.
Why so dark? As Zingales suggested last fall, the trouble began with the Bush bailouts and the cynical premise that saving some Wall Street firms would prevent apocalypse or even benefit the rest. (No accident that the trust-o-meter was created in Chicago, not New York). As Zingales put it post-bailout, "Do we want to live in a system where profits are private but losses are socialized?"
More recent Obama-era ideas like the pending Public - Private Investment Program sound friendly but, again, reward specific partners while leaving others out.
Worse, the very unpredictability of Washington's actions is making investors hesitant to get back into the market. Keynes may refer to animal spirits. But Sapienza and Zingales argue that the average market player is like someone at the Monopoly board, who walks away when the rules, whether made by Democrat or Republican, change too often.
"You just don't want to play anymore because you are not sure," Sapienza put it last week.
My own view is that "trust" work is important. By now everyone has noticed that uncertainty in the economy matters. We've also noticed that fiscal stimulus measures don't seem to work as well as hoped, whether they are Bush's infantilizing checks of last summer or Obama's humongo outlays.
The new Financial Trust Index may not yet be delivering particularly glowing news. Still, its very existence is another cause for market optimism.
(Amity Shlaes is a senior fellow at the Council on Foreign Relations and a Bloomberg News columnist. The opinions expressed are her own.)
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.