Depressing as it may be, it is important to draw attention to the unfortunate three-year failure to resolve the current economic crisis. The fiscal experiment consisted of a zealous application of standard Keynesian folklore -- stimulus packages, earmarks, and executive spending decrees -- leading to shocking deficits.
This is a misguided notion. Based on what we know of incentives that drive a free-market economy, the emphasis on stimulus spending (of all sizes, shapes, and colors) to diminish private unemployment wrongfully puts the cart before the horse. The horse is private investment spending, and the cart is the goal of increases in private jobs and national income.
WELL-KNOWN TO virtually everybody is the fact that increasing private investment directly enhances private job creation. However, many entrepreneurs currently view new investments in enterprises with grave trepidations as being too risky to warrant the investment outlay, despite the efforts of stimulus-minded politicians and journalists and a virtually zero-percent federal funds rate.
Stimulus programs, while making modest contributions to social welfare spending, have failed to create a significant number of permanent private-sector jobs. Whatever benefits they might provide, however, are overwhelmingly negated in the minds of risk-taking entrepreneurs through threats of future tax increases, government fee increases, added repressive government mandates and regulations, and coercive suggestions of even more stifling actions -- not to mention the inflationary threat of an unprecedented ability to expand federal reserve credit, including the money supply.
This, coupled with a constant stream of invective by White House spokespeople and politicians directed at entrepreneurs, savers, the wealthy and risk-takers, frightens and weakens -- if not destroys -- risk-taking incentives.
UNFORTUNATELY, THESE negative factors spill over to the lending side. Because of uncertain future taxes and costly regulations that will bear upon the prospective borrower, bankers of all stripes -- commercial, investment, mortgage -- as well as other fund providers, are l ead to take a dim view of the borrower's ability to repay the loan, and thus are more than normally inclined to refuse the proposal.
We are not in danger of a liquidity trap. If we were, prices of government bonds would be skyrocketing. The system contains abundant liquidity, thanks to an aggressive monetary policy. Instead, we face a risk trap: Because of this vast, frightening, uncertainty, both those who would demand resources, and those who normally supply them, cannot reach an equilibrating rate of interest, even one of nearly zero percent. The competitive, free-market system is virtually frozen.
If not persuaded of the inadequacies of these policies, surely one must be convinced of the need to adopt a more logically compelling process. Reversing stimulus spending and oppressive tax and regulatory policies would be moving towards a sensible, confidence-restoring path. By dampening these government inspired disincentives, free-spirited entrepreneurs, and fund providers will be encouraged to invest resources for risky ventures. Business leaders will again provide leadership and training for workers, who contribute immensely to making the world go around.
BY UNLEASHING this vast store of energy, expansionary drive and innovations, the propulsion of normal market forces will allow authorities to see the fruits of a real stimulus -- because, inherently, increasing private investment means enhanced private employment.
(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)