May 24, 2012

The Great Jobs Argument — which will be with us until the election — has an interesting and largely ignored subplot. It’s about confidence: Which candidate will instill more of it and how much does it matter for accelerating the sluggish economic recovery?

On one level, the political combat over Bain Capital is simply about symbolism. Will President Obama succeed at branding Mitt Romney a capitalist predator, earning his wealth off the suffering of others? Or will Romney manage to portray Obama as a self-serving opportunist, castigating business simply for immediate political gain? But beyond this battle lies a subtler question of economic consequences.

Between Romney and Obama, there are deep and genuine differences. It is no doubt true that Romney understands the private sector better than Obama. He grasps intuitively what Obama, who has no hands-on business experience, seems to recognize only intellectually: Economic growth and job creation depend fundamentally on profitability. Companies won’t expand if regulations or taxes threaten to reduce or eliminate profits. Uncertainty about the future — inevitable under the best of circumstances but compounded by unknown government policies and actions — will reduce investment by raising risk.

The implication is that a President Romney would be friendly to business in ways that Obama hasn’t been and, should he win a second term, almost certainly wouldn’t be. Just what specific policies would change is hard to predict, but the underlying attitude would be different.

By contrast, Obama, though acknowledging that the private sector is the main engine of American prosperity, sees business as a flawed institution whose worst instincts must be curbed by government oversight. Only then will popular trust be maintained, allowing the country to enjoy the fruits of the system’s basic strengths. In this view, companies — and particularly large corporations — need to be restrained, regulated and channeled to minimize unethical or undesirable conduct and to advance the public interest.

In Obama’s first term, the Dodd-Frank financial regulation law was the poster child of this approach. But it surfaced in many areas, from health care to fuel economy standards in the auto industry. While not abandoning “the market,” Obama wants to shape it to his political will. As for profits, companies are assumed to take care of themselves.

Each approach speaks to confidence: Romney to business confidence; Obama to consumer confidence.

Romney’s assumption is that unless the business climate improves, the recovery will continue sputtering because companies will lag in expanding, hiring and investing in new plants and products. Obama’s hostility to business, in this view, hobbles the economy.

Obama’s presumption is just the opposite: Anxieties for the future are driven, in part, by fears that American business does not have this nation’s interests in mind. Dispelling these doubts will help restore people’s faith in the future — and their willingness to spend.

Though some of these arguments about confidence are made openly, many are implicit in how Romney and Obama speak and behave. Interestingly, they come just as some economists are emphasizing the role of fickle psychology in determining business cycles. For years, the dominant approach has been to explain the economy’s twists and turns through the interaction of measurable variables: interest rates, incomes, inflation, exchange rates, debt.

But collective mood swings are more important as “the ultimate drivers of the economy,” argue George Akerlof, a Nobel Prize-winner who teaches at the University of California at Berkeley, and Yale University economist Robert J. Shiller in their 2009 book, “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” (John Maynard Keynes, the English economist, first coined the phrase “animal spirits.”)

Akerlof and Shiller aren’t alone. A study recently published by the National Bureau of Economic Research concludes that shifts between mass optimism and pessimism “account for over 50 percent of business cycle fluctuations.” Psychology matters, even if (as is possible) studies such as this one may overstate its role.

What this suggests is that the campaign — so far — is shortchanging the voters and the country. The Great Jobs Argument has followed a familiar script. Both Obama and Romney promise sweeping gains and slam each other. The missing ingredient is a logic that gets us from here to there. Can the president defend why his antagonism toward business isn’t weakening the recovery? Can Romney explain how his pro-business attitudes won’t simply result in abusive behavior or windfalls to companies?

These are good questions without, as yet, good answers.