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Zingales vs. DeLong: Eccles wins!

So Luigi Zingales, from the University of Chicago, said that "the current crisis is not a demand crisis, it is a trust crisis," as quoted in Brad DeLong's post. DeLong replies that "bad government policies certainly produced a trust crisis," and "as a consequence, all across the economy agents cut back on their expenditures on currently-produced goods and services." In other words, this is a confidence crisis that led to a demand crisis.

Marriner S. Eccles, the chairman of the Fed during the depression, wrote in his autobiographic book, Beckoning Frontiers, that "confidence itself is not a cause. It is the effect of things already in motion. (...) What passed as a 'lack of confidence' crisis was really nothing more than an investor's recognition of the fact that new plant facilities were not needed at the time." Put clearly, lack of trust is the result of lack of demand. I suppose, in Chicago and Berkeley, Eccles, and common sense, are démodé.


  1. It's always hard for me to imagine a business that won't expand in response to sales because they don't "trust" the possible regulatory environment or some such thing. Catherine Rampell put together a chart of the single most important problem facing small businesses as reported in the NFIB survey (
    What was interesting was that there was a spike in the percent of small businesses that cited sales as the problem, and not regulatory environment or quality of labor. So clearly businesses don't believe this confidence story! But more than that, the chart reveals that a fairly constant proportion of small businesses complain about regulation and taxes from 1986 to 2009! That is, a certain proportion of businesses will always say that they are being held back by trust or taxes no matter the regulatory environment or the level of taxation! One is reminded of Kalecki's insight that the notion of business confidence is a political tool.

  2. Great graph! Also, quality of labor shrinks, so unemployment does not seem to be about lack of adequate skills.


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