Anyone who has had even periodic exposure to the editorial pages of American newspapers or the expert panels of Sunday-morning news shows has probably heard Paul Krugman speak about the government’s proper role amid economic recessions, and particularly his trope about the mythical “confidence fairy” which in his mind has kept the government from exercising this role amid the current recession. His basic argument, which he repeats several times a week in different guises, is that the government should be spending more, not less, during recessions in order to stimulate commerce through the creation of public sector jobs. Thus for him, the policy of “austerity” which has been championed by the Republican party (most notably by Rep. Paul Ryan and Gov. Chris Christie) and effectively implemented throughout almost all of Europe is exactly the opposite of what should be done, and represents in his mind an abdication of the State’s responsibility for the common good. “For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine,” he says in his most recent op-ed column appearing in the New York Times this past April 26th.

According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.  Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the ‘austerians’ insisted that the reverse would happen. Why? Confidence! ‘Confidence-inspiring policies will foster and not hamper economic recovery,’ declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

“The good news,” he goes on to say, ” is that many influential people are finally admitting that the confidence fairy was a myth.”  The austerity programs in Europe have made things worse, not better, and particularly when one compares them to the more moderate policies implemented by the US, it seems as if experience is validating Krugman’s oft-repeated argument.

I must admit that my usual response to Krugman’s consistent contribution to public discourse has been bewilderment, fatigue and disgust. I found it hard to believe that in the face of our nation’s skyrocketing debt, that someone would have the gall to propose that we should accrue even more debt. I mean, I’m no economist, but was it not our irresponsible profligate spending and the blithe acceptance of unsustainable levels of debt that brought about the economic collapse from which we are still recovering? Why then would we want to place our hopes for recovery on a doubling down on the same policy that got us in to this mess? Why should we view profligacy in the public sector as a cure to the pathology caused by profligacy in the private sector? One does not need to entertain the role of “confidence fairies” to be suspicious of that strategy.

In addition, I have always considered the “confidence fairy” to be the reddest of red herrings, since the rationale for austerity has always been primarily a negative rather a positive one. We need to control debt, say the “austerians,” in order to preserve the functionality of government as an economic actor. The consequences of not paying one’s debts are very real and dangerous; one need only look to the financial impotence of Greece to see what happens when governments spend more than they could ever realistically repay. As with every individual, a nation’s credit, along with the interest rates tied to that credit, serve as a check to unrestrained borrowing. It is not about any positive reward for virtue, as Krugman claims, but rather about the most basic conditions under which any economic agent can function. It is just a fact that we have reached our credit limit, the austerians would say, and so we have to find way forward other than more spending. Krugman’s only reply to that negative rationale, so far as I can tell, is to point to Japan, which continues to borrow at a very low interest rate despite years of heavy debt. Krugman thus never denies the dangers of debt in principle, but only downplays the probability of their coming to bear on developed economies in the present context. “It hasn’t happened to Japan yet,” he says in effect, “so why should we be scared that it will happen to us?”

Needless to say, I have found Krugman’s argumentation deeply unsatisfying from an intellectual point of view, but after reading his recent obituary for the confidence fairy something clicked in my mind that made me understand where he was coming from, and why his pleas for more governmental involvement were so persistent and heartfelt. The catalyst for this insight came with a rereading of Centesimus Annus in the wake of the government-led turnaround of the American automotive industry. First, let me spell out the contribution of Centesimus Annus. In section 40 of the 1991 encyclical, Bl. Pope John Paul II writes,

It is the task of the State to provide for the defense and preservation of common goods such as the natural and human environments, which cannot be safeguarded simply by market forces. Just as in the time of primitive capitalism the State had the duty of defending the basic rights of workers, so now, with the new capitalism, the State and all of society have the duty of defending those collective goods which, among others, constitute the essential framework for the legitimate pursuit of personal goals on the part of each individual. Here we find a new limit on the market: there are collective and qualitative needs which cannot be satisfied by market mechanisms. There are important human needs which escape its logic. There are goods which by their very nature cannot and must not be bought or sold.

As I read this passage, I came to the realization- which many have come to much more naturally than myself- that the State should not itself be thought of as just another actor in the market. One of the State’s principal tasks in defending the common good is to regulate the market, and in carrying out that task it should not presume to act according to all the orthodoxies of the market. Its job, after all, is to determine the limits of market orthodoxy, especially when that orthodoxy adversely impacts the well-being of the citizenry.

In other words, market mechanisms are not ultimate, according to Catholic Social Teaching, and while the government should understand and respect the ways that markets work, it should not view itself as wholly subject to market forces. The point sounds extremely elementary, I know, but it helped me to see the blindspot in the analogy between private and public profligacy upon which I had hitherto relied. While no one would argue that the kind of profligacy displayed by the banks and by individual citizens before the mortgage crisis is ultimately sustainable, one should not be so quick to turn first and foremost to market mechanisms in order to figure out how to address that problem from a legislative standpoint.

It is the State’s job not only to preserve the conditions under which the market can function, but also to make substantive judgments about the social ends which the market is meant to serve. What are the limits of the market? What can and cannot be bought and sold? When should we disregard calculations of maximal efficiency for the sake of irreducible human goods? These are moral questions which the government must make, and it cannot make them based upon economic theory alone.

So that insight opened me to the idea that the State  should not consider itself beholden to the normal prudence of the marketplace. I then considered how that insight might apply to the bailout and subsequent resurrection of Chrysler and General Motors, which as many pointed out at the time of the bailout, went directly contrary to the free market notion of “creative destruction.” Let me say that I have been incredibly impressed and heartened by the turnaround of the American auto industry; so much so that I feel I can point to it as a model for how the State may successfully act upon the market in order to preserve those social goods for which the market provides  the means. Here the government acted against the consensus of purely economic prudence, and succeeded beyond all expectations. So how did the State pull it off?

Let me postulate the existence of another quite different “confidence fairy:” the confidence which binds together the civil authority and the people entrusted to its care. Granted the options were very limited at the time of the automotive bailout, and the unions were likely motivated by necessity above all else, but the fact remains that they compromised with  the government-appointed ownership. They found a way to move forward, to make things work, and that required trust. Nothing inspires trust more than a lack of any other alternative, but trust was necessary nonetheless. Likewise, there is implicit in the possibility of this kind of governmental action a measure of trust between the State and the citizenry. Citizens in a democratic society must place some measure of trust in the government in order for it to take steps like this one.

If citizens do not trust the government- if this confidence fairy is incapacitated- then resentment within civil society will grow and fester and eventually tear  the fabric of democracy apart. I for one am generally distrustful and suspicious of government (which is merely to say that I share a perennial American sentiment). Yet the auto bailout has inspired a flicker of confidence in me, and has moreover led me to the realization that if the State is to be more than simply another actor within an all-pervading economic reality, then the trust which the citizenry places in the State is absolutely vital. If market theory is no longer the common language spoken between government and citizens, then what is? If our polity is going to avoid descending (further) into pure unmediated conflict, then some common language must replace the “market fundamentalism” which has come to dominate the political arena these last three decades. If Krugman has truly buried the confidence fairy as a mechanism of the free market, then another confidence must rise in its place in order to support the kind of role Krugman wants the State to play in relation to the market.

Government stimulus and aid cannot be another market mechanism; it must be a genuine expression of subsidiarity, ennacted on behalf of the social ends at the heart of the common good- ends which are incommensurable with market schematics. Yet there is no getting around the hard truth: this model of governmental intervention requires that the government must be trustworthy. Any vision of the human good that might replace the prevailing “market universalism” and inform a different conception of the State’s role has to presume a level competency and integrity sufficient to earn the trust of the citizenry. A gross lack of such competency and integrity is what makes me continue to be pessimistic in this regard (in contrast to Krugman’s curiously blithe optimism), but the resurgence of the American auto industry presents us with one authentic reason for hope.