The key to recovery: Boosting business confidence

Keynes saw through this sterile debate 75 years ago, writing to Roosevelt that “the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees” or that “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.” The right approach today involves borrowing from both lines of thought.

Government has no higher responsibility than ensuring that economies have an adequate level of demand. Without growing demand, there is no prospect of sustained growth, let alone significant reduction in joblessness. And without growth and a reduction in unemployment, there is no chance of engineering reductions in government deficit. Meanwhile, the risks of inflation, promoting excessive risk-taking and inefficient spending need to be balanced. But the fact remains that markets are largely concurring with the judgment of individual business managers that increasing demand is the sine qua non of a return to economic health.

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Businesses are understandably uncertain about their prospects after the events of recent years. This is no time to add unnecessarily to their worries. Except where the rationale is urgent and compelling, new regulations that burden investment should be avoided. Growing inequality will have to be addressed in the United States and beyond. But there is the risk that policies introduced in the name of fairness that excessively burden job-creating investment could actually exacerbate the challenges facing the middle class. At a moment of substantial doubt about government’s functionality, government could greatly increase confidence by devising clear plans to better align spending and taxing once recovery is established.

By working to directly increase demand and augment business confidence, governments have the best chance of creating economic recovery. That should be the near-term focus of economic debates at Davos and beyond.