Animal Spirits and Policy

The Bush and Obama Administrations have spent over a trillion dollars on various bailouts over the past 2 years. Arguably, that spending has kept us from falling into the abyss of another depression. Even though we are on the cusp of a double dip recession, it is clear that we are on firmer ground than we were 18 months ago.

Going forward, how do we establish a terra firma from which to proceed? It is clear that we must GROW our way out of this mess. Unemployment continues at unacceptably high rates; the consumer continues to keep a firm grasp on his wallet; the banks are reluctant to lend; surviving industries are unwilling to invest in new employees or capital infrastructure;the whole economy has a bad case of paralysis.

The FED recently announced its intention of enacting a new round of quantitative easing (QE); this means they will buy up securities which will have the intended effect of increasing the money supply. The danger of this is that an increased money supply will lead to inflation--a result that is bad for everyone and everything.

What is needed is growth. In this environment, growth comes from two sources: animal spirits and public policy. Animal spirits is the term used for entrepreneurship...the effort made by business to create or expand operations; to make investments with the hope of a decent return on investment. Such entrepreneurship necessarily entails risk. While risk is acceptable to entrepreneurs because it can be quantified and allowed for, uncertainty cannot be quantified and allowed for.

This is where public policy comes in. Public policy must be clear and allow risk to be evaluated clearly. Any public policy which fosters uncertainty will quash animal spirits dead in its tracks. Nouriel Roubini describes risk as being handed a revolver with one bullet in the cylinder and being asked to play Russian Roulette; uncertainty is being handed a revolver with NO information as to whether there are 2, 6 or no bullets loaded in the chamber. Which game would you play?

Unfortunately, the public policy of the last 2 years has increased uncertainty and absolutely stalled any animal spirits which may have existed. Hence, the present paralysis. Huge quantities of political capital have been spent on Healthcare Reform; in short, access to a dysfunctional system has been expanded with no attention to the bigger problems of cost and quality. This reform increases uncertainty about how much greater will be the inflation of medical costs which have risen at a steeper rate than other costs for business. Financial reform, a 2500 page document full of uncertainty, has left most practical decisions about important issues such as capital requirements, to new political committees yet to be formed. In other words, these reforms have increased uncertainty rather than decreased it. Risk is manageable.... uncertainty is not.

Both parties need to put their child-like ideologies behind them and work toward a goal of developing public policy that will encourage and nurture animal spirits. Public policy needs to become more business friendly. This is not a matter of ideology, this is a matter of pragmatism.....a matter of survival. If the existing anti-business policy trend continues, animal spirits will continue to be suppressed, growth will remain elusive and ideology (any ideology--whether left or right) will become academic. In order to foster growth, everything needs to be on the table: Medicare, Social Security, Pensions, taxes, Defense spending, War(s),--nothing gets a free pass.

If we cannot foster growth, then crushing unemployment will lead to civil unrest. At that point, we will regret that we did not seize the opportunity to create a reasonable public policy to foster growth. Ideology needs to be put aside; the cold clear logic of pragmatism needs to be the order of the day. My confidence that our present political system can adapt to this necessity in constrained.