Fewer 'animal spirits' and more citizen disincentives imperil economy

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Of the many pitfalls this nation faces, there are few that are as fraught with more danger than the fiscal path being plotted by President Obama and his White House staff.

Our politicians are simply not aware of the importance of stimulating private investment -- this after over two years in the doldrums, offering instead further threats to any risk-takers' economic well-being. Nor are they aware of the unpleasant consequences that current laws have on creating voter incentives to forgo citizen responsibility to control government expenditures.

Our automatic stabilizers have helped natural business-cycle dynamics and monetary policy halt the economic decline. Natural business cycle dynamics include, at their core, emphasizing the importance of strong economic incentives in a free, and always risky, market economy, with the institutions of private property, the law of contracts and the ability to contract freely as vital supporting elements.

John Maynard Keynes was well aware of these factors, but he swept them under the rug with his unfortunate catch-all term "animal spirits" -- as if establishing the conditions for aggressive risk-bearing to flourish was of minor importance. After a sufficient period of deficit spending, he virtually implied, these spirits would be ignited, ensuring a strong economic revival.

Consequently, many of today's economists, especially those in the White House, mistakenly regard "animal spirits" as a given. Quite the contrary -- they must be aroused, and are the key to recovery and of much more importance than stimulus programs.

THESE ECONOMISTS, while adept at suggesting new ways of redistributing wealth and income, are weak at developing incentives for stimulating the private risk-taking required to replace the wealth taken by their wealth-transfer programs. Instead, White-House spokespeople constantly threaten risk-takers with higher taxes and even more onerous regulations, leaving them wondering what the next ominous threats will be.

The lack of positive tax incentives, in combination with even more threatening political actions, is bound to produce restrained private investment spending and low employment.

Experience has taught us that the single most effective way to arouse "animal spirits" is a tax cut to business (recall the Kennedy, Reagan and Bush cuts and, in particular, the fact that arousal of "animal spirits" was an essential ingredient of supply-side economics.) Further, academic research repeatedly has confirmed the importance of taxes in elevating private investment spending.

In the past, many colleges offered undergraduate courses on "business cycles" using a textbook such as Prosperity and Depression by Gottfried Haberler, which focused on the grinding adjustments a free-market economy incurs in a recession to adjust capital values, imbalances (excessive inventories and pools of manpower, for example) and other distortions, and the long and arduous re-contracting process, necessary to provide a durable foundation for a strong revival.

In modern academia, these kinds of analyses have been supplanted by courses on macroeconomics, where the emphasis is on fine-tuning the economy and growth. In fact, some of my colleagues felt so confident in their econometric refinements of the business cycle that they told me, half-jokingly, that they had worked their way out of a job. Five recessions later, they are still working.

THE STUDY OF MARKET incentives and the price system has been sacrificed to the worship of "aggregates." In removing virtually all such studies, we have thrown the baby out with the bath water. Explanation of how a market economy works, including the powerful role that personal incentives play in the face of risky investments, has become a lost art.

Of equal importance to the question of arousing robust private investment are several, often overlooked, but serious voter financial disincentives. How to encourage the motive to undertake risky private investments in the face of both onerous tax burdens and restrictive government and union regulations is, indeed, a problem.

But it is exacerbated by a growing citizen indifference to escalating government expenditures. This behavior stems from 1) the growing fraction (more than 40 percent) of citizens who pay no income taxes, and hence have little or no financial incentive to reduce government expenditures, but instead have a perverse incentive to increase them; and 2), a growing proportion of citizens who receive more cash flows from the government than they currently pay in taxes.

Given this evidence, is it any wonder there is a conspicuous decline in citizen interest in wanting to curb the expansion in government expenditures?

These overhanging problems, if uncorrected, imply that government expenditures can easily continue to grow at an unbounded rate, breeding an additional range of unpleasant possibilities -- outcomes that are now reasonable consequences of escalating citizen disincentives.

(The writer is a University of Georgia professor emeritus of financial economics. He lives in Aiken, S.C.)

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CarlosC
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CarlosC 03/07/10 - 12:16 am
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Dr Beranek, thank you very

Dr Beranek, thank you very much for providing this clear explanation from a true expert's perspective. I hope it does not fall on deaf ears (eyes).

Fundamental_Arminian
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Fundamental_Arminian 03/07/10 - 05:13 am
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I agree that it's important

I agree that it's important not to discourage investing, which will happen when the tax cuts expire on capital gains at the year's end. But what about the oppression of wage-earners? Why should people who earn upward of $250,000 a year in wages be in a 50% tax bracket while multimillionaires who earn far more in dividends, capital gains, and interest from tax-free bonds are allowed to pay 15% or less in taxes?

It's no wonder that CEOs of major corporations opt to be paid in stocks and stock options instead of wages. Of course, wage-earners aren't given that option.

deekster
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deekster 03/07/10 - 06:59 am
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Wake up Mr Baranek, please.

Wake up Mr Baranek, please. This path is "by design". The "powers in Washington" are not ignorant of "pitfalls". They are the architects of economic pitfalls. Weaken the citizenry and Strengthen the State. By Marxist Design. The government is not "ignorant and apathetic". It is "we the people". You cannot be healed until you recognize the sickness.

deekster
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deekster 03/07/10 - 07:07 am
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Socialist Progressives do not

Socialist Progressives do not care if we have a "tea party revolt", a "fair tax revolt", a Medical Care Revolt" or a "Fascist Revolt". They both "welcome and worship at the feet of revolution". Socialist Progressives are driving the "people's revolution". Current government policies are "driving America to revolution". Don't you see.? They care not the "means", but the "end". Destruction of the Present System. What arises from the dust will be fodder for the next revolt. You can be a Christian or a Capitalist. We could have a "religious revival or an economic revival". Socialism Marches On.

deekster
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deekster 03/07/10 - 07:19 am
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The Civil War, The New Deal,

The Civil War, The New Deal, The Great Society, The Civil Rights Movement, The Free Love and Drugs Movement, The Anti War Movement. All of these were Socialist Progressive "mini revolutions" that dramatically changed America. They were true revolutions". They were "genuine revolutions". We have been brain washed to only see revolution in terms of Cuba. "Boiling the Frog". "Boiling the Frog".

johnston.cliff
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johnston.cliff 03/07/10 - 09:43 am
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The TEA party revolts are an

The TEA party revolts are an example of the reaction of the citizens not indifferent to out of control government spending. We made a horrible mistake with our diversity president and we'll have to pay for it another 3 years. Concerned citizens can start making a difference in November by removing American obstructionists, regardless of party.

JohnRandolphHardisonCain
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JohnRandolphHardisonCain 03/07/10 - 05:06 pm
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Over two years in the

Over two years in the doldrums started with a financial collapse on George W. Bush's watch followed by the first bailout also during Bush's term. Obama made the mistake of listening to Wall Street insiders and national security hawks. Obama failed to end the wars, did not bring all the troops home, did not slash defense spending, and did not initiate fundamental banking reforms with strong regulatory oversight.

Obama bailed out the banks but failed to help the millions of struggling little guys. Obama did not take on the for profit medical monopolies. Obama did not go far enough. That is why he is failing.

Too many former Goldman Sachs executives are power players in Obama's administration. Obama failed to take on the big monied interests because he is an Establishment politician with deep pockets on Wall Street.

Thanks for the big business / billionaires' perspective on supply side economy, Professor Beranek. Supply side economics never worked. Reaganomics accelerated the deindustrialization of America, increased the national debt, and led to short term profiteering and speculation not to economic sustainability. Fancy financial instruments were created which flourished under Clinton and eventually caused an economic collapse under George W. Bush.

I want to curb government expenditures. Start by ending all U.S. wars, bring the troops home, and cut defense spending by 50%. That can save as much as $500 billion a year. Rewrite corporate tax laws, eliminate off shore tax shelters, and close loopholes in the current tax code.Our military-industrial-war economy is not sustainable. We can develop a post fossil fuel economy that is sustainable environmentally and economically but only if we first end the wars that have bankrupted this country.

baronvonreich
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baronvonreich 03/07/10 - 07:16 pm
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When will politicians get a

When will politicians get a backbone, stand up to the greedy, lazy, entitled seniors, and stop the ponzi schemes of Social Security and Medicare? When will they reinforce that notion that retirement is not a right for all irregardless of a lifetime of choices and financial independence? When will they stop promoting the survival of those too lazy or ignorant to contribute to the future of America and let social Darwinism clean up America before it is too late? Will Americans ever have the stomach to witness the suffering, that is inevitable and will only get worse with every passing day yet needed, when the difficult choices are finally made?

chascush
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chascush 03/07/10 - 07:20 pm
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JRHC, you are really off

JRHC, you are really off track. “Rewrite corporate tax laws, eliminate off shore tax shelters, and close loopholes in the current tax code”. “Reaganomics accelerated the deindustrialization of America”.
Reaganomics actually increased industrialization by encouraging companies too invest. If you want to drive the remaining businesses in US out you have the prefect strategy.

JohnRandolphHardisonCain
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JohnRandolphHardisonCain 03/07/10 - 07:39 pm
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chaschush, You don't remember

chaschush, You don't remember "the giant sucking sound" of jobs going to Mexico under Reagan/Bush41? American companies went off shore en masse under the Republican's false idol Reagan. Reaganomics did not encourage American companies to invest in America or in American workers. Neither did Clinton or Bush43. Just saying the truth.

Obama inherited a hollowed out, debt ridden economy whose speculative bubble had burst shortly before he was elected. And don't expect a return of good jobs anytime soon - not with numerous wars the U.S. is now fighting and losing and with America facing a staggering debt burden.

Bush 43 doubled the national debt and left this country in a hole so deep that it will take a generation or more to overcome. And Obama has continued Bush's futile wars and propped up the American elite financial Establishment.

AIG and other Wall Street investment banks are doing quite well, thank you, and they are taking care of their own not the little guy. So much for "private investment" coming to the rescue.

Reader54 wrote yesterday that Obama and America should declare a war on corruption. That is something that ordinary Americans of all political stripes should support!

KSL
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KSL 03/07/10 - 07:29 pm
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JRHC, you say "I want to curb

JRHC, you say "I want to curb government expenditures. Start by ending all U.S. wars, bring the troops home, and cut defense spending by 50%. That can save as much as $500 billion a year. Rewrite corporate tax laws, eliminate off shore tax shelters, and close loopholes in the current tax code.Our military-industrial-war economy is not sustainable." But several times in the last week or so you have added in your statements that the $500 billion a year savings could go for paying for health care. You don't really want to cut the spending. You want to redirect it.

KSL
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KSL 03/07/10 - 07:43 pm
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If Obama should declare a war

If Obama should declare a war on corruption, he needs first to look to his cabinet and czars and next to members of his own party. Then on to the repubs. That would make his war (and intent) a bit more credible.

JohnRandolphHardisonCain
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JohnRandolphHardisonCain 03/07/10 - 08:00 pm
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I have repeatedly said, KSL,

I have repeatedly said, KSL, that United States cannot have guns and butter too. I have supported basic universal health insurance for all Americans for the past 40 years. I have also supported a single payer (i.e. government) public option (i.e. universal) health insurance since 1992.

That said, health care reform is not my top priority. The top priority is peace. Obama could have saved $2 trillion in his first term by ending all U.S. wars, bringing all American troops home, and halving the Pentagon's budget. Our defense spending would still dwarf every other country in the world's military spending.

Obama's health care plan (with a public option) would cost $1 trillion over the next ten years. We could save or spend the money however we need to - on economic stimulation, job creation, alternative energy production, mass transportation, education, etc. This could be America's golden opportunity to reinvent itself - using appropriate technologies and entrepreneurial opportunity - into a sustainable economic power than continues to lead the world.

Building more military hardware and fighting more wars is not the path to the future. Moving beyond warfare and beyond fossil fuel based economies is the only certain path to a sustainable future. Sacrificing warriors and worshiping generals won't protect us or get us where we need to be. Continuous warfare will lead to our collapse - economically, politically, and militarily. Peace is the only way forward.

johnston.cliff
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johnston.cliff 03/07/10 - 07:59 pm
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Cain, if the utopia you

Cain, if the utopia you envision were to come about, all competition would have to end simultaneously around the world. Without competition, no one would be trying to "get ahead", because to do that, you would have to be better than someone else. To determine who is the best, there would have to be some way to keep score so the scores could be compared, voila, competition. Is that simple enough? People will compete. That's what they do. Your fantasy utopia won't happen. You can keep wishing for it, though. Personally, I'd rather be able to teleport at will. Somebody must agree with me because they wrote and produced the movie Jumper. The difference between my fantasy and yours is ..... I recognize mine for what it is.

JohnRandolphHardisonCain
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JohnRandolphHardisonCain 03/07/10 - 08:11 pm
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No bid government contracts

No bid government contracts for KBR and other "defense" contractors is not "competition", johnston.cliff. China is eating our lunch with "competition" while we are waring away our competitive advantage and making our economy, such as it is, dependent on continuous borrowing from foreign lenders. Competition you say. We're losing that "war" too.

Building all those heavy mine resistance V shaped vehicles for Iraq was a dead end. They don't work in Afghanistan. So now we are building billions and billions more of light weight mine resistant vehicle for Afghanistan than can navigate off road. Good for business if you are a builder of those government contracted vehicles. Bad for the bottom line for American taxpayers. Yes, it will save American lives, but we still won't win a military victory in Afghanistan.

Afghanistan is another rat hole for America to throw its borrowed money into for years and years. And then it will be Pakistan, and then Iran, until United States collapses the same way the Soviet Union and so many other empires have collapsed - by undertaking unwise, un-winnable foreign wars.

johnston.cliff
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johnston.cliff 03/07/10 - 08:13 pm
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Our subsidy programs and

Our subsidy programs and wealth redistribution is killing capitalism. Over expenditures is killing our budget. Who competes with the federal spenders? Calling KBR contracts "not competition" obviously doesn't mean they're spending more money on lobbying than their competition, right? Just because you choose not to see the competition where it exists and just because you don't like the type of competition that fits the available hole, doesn't mean it's not happening. Wars are competition. "My philosophy is better than yours and I'll kill you until you agree."

KSL
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KSL 03/07/10 - 08:13 pm
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Cain, I know what you have

Cain, I know what you have said and I agree with you about peace. But peace takes more than one country to decide on that route. We can't just cut our defenses that much and expect that to be enough to appease the nuts out there. They just love to see weakness.

johnston.cliff
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johnston.cliff 03/07/10 - 08:18 pm
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So, Cain, defending our

So, Cain, defending our country is the same as nation building to you? There's no distinction? Well, that attitude calls for total capitulation to those willing to compete. That's not the mindset that settled America.

KSL
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KSL 03/07/10 - 08:21 pm
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Cain, Afghanistan was okay

Cain, Afghanistan was okay as long as we were going after the 9/11 perpetrators. When did we get them all?

KSL
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KSL 03/07/10 - 08:22 pm
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jc, I'm stopping now. I get a

jc, I'm stopping now. I get a little uncomfortable when it looks like ganging up.

TheFederalist
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TheFederalist 03/07/10 - 08:54 pm
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Thank you Mr. Beranek, but

Thank you Mr. Beranek, but what you may or may not know is that the current administration is not the least bit interested in doing any of the things you suggested. Mr. Hussein & Co are socialist/progressives that are out to tear down capitalism, by creating an economic crisis that will enable them to massively expand the government. On several fronts this agenda is already in process, and the ultimate goal is a grandiose experiment in radical transformation of our nation's historical, philosophical and constitutional base, to one that better suits these ideologues. They will never try and make capitalism work, or even survive, because they believe that it is a system that is inherently flawed and evil by nature. Further, the larger the "Nanny" state becomes, the further it will become entrenched, because more will become used to the freebies, thus ensuring their future votes for those that are even now, spending our nation into bankruptcy. Once the ecomomy collapses, guess who rides in to rescue us, telling us that our failed system needs to be replaced? Yep, the same ones that caused the problem in the first place. Game, set and match. I used to think that the american people were too wise to fall for this scheme, and perhaps history will bear my beliefs out as being correct, but looks grim at the moment. Somebody once said that you need to stand for something, or you will fall for anything. Guess it's time to stand folks.

audioofbeing
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audioofbeing 03/07/10 - 09:14 pm
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"Our subsidy programs and

"Our subsidy programs and wealth redistribution is killing capitalism."

I can't argue that a lot of our subsidies are poorly designed and incentivize the wrong things, but you are aware that about 70% of the net worth in this country rests in the hands of the 10% of people, yes? If this is wealth redistribution, we're really bad at it.

On the other hand, if this is capitalism thriving, this is just about how things should look. If large chunks of it are unchecked by government. And they are.

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