As inflation rises to levels not seen since the ‘80s, the commentariat is abuzz with discussion of reasons and remedies. One expression oddly absent, first uttered by John Maynard Keynes, is “animal spirits.”
The U.S. economy since the 2008 financial crisis has been sustained on near-zero interest rates, and boosted during the Covid crises by emergency aid injections. Meanwhile, from 2008 to 2020 the Federal Reserve failed to get inflation up to 2% and now struggles to keep inflation in check. It would seem that in an economy of healthy animal spirits, of enterprise, initiative, and will to work, there would have been growth in the 2021s that would have generated a certain level of inflation. Conversely, inflation in 2022 is not only attributed to supply chain disruptions but also labor shortages, which do track with emergency payments and provisions to cushion the effects of the pandemic. It feels as though initiative and enterprise are missing today as well.
Whether, or if so how, government bears responsibility for this torpor will depend on interpretation, which may well be politicized. One view says excessive money supply from the Fed after 2008, plus a huge injection of Fed-financed aid during the pandemic, saps incentives from the economy. Another says the concentration of money flows in financial machinations and the dominance of large corporate bodies have depressed confidence that regular persons’ efforts matter, or will receive fair consideration.
Either way, the American economy has no means to secure consistent fiscal stimulation, as spending ultimately requires legislation and our polarized politics impede both reasonable planning and any chance of taxation to support it. The Fed can only raise or suppress interest rates and money supply, while any spending increases that Congress may manage to approve will likely incur deficit financing. The Fed would then have to manage the deficits’ inflationary effects, and trading flows of the extra Treasury notes in the markets.
Furthermore, much of our economic enterprise responds to financial engineering, which has indeed made home buying and consumption easier, spurred technological developments, and grown into its own industry. But sub-prime mortgages, credit card debt securitization, and outright fads – from Special Purpose Acquisition Corporations (shell companies floated on the stock exchange to acquire rising technology companies) to Non Fungible Tokens (ownership rights in some meme that then get traded on the markets) – generate huge flows of “investment” that amount to re-circulation of funds in the trading markets. Large corporations have developed the habit of buying back their shares, to boost returns per share while throwing cash, often borrowed, back to investors, the largest of whom in turn throw it back into the financial pot. The idea of enterprise has too little to do with the world of goods and services – and alternatives are hard even to imagine. The financial sector has also generated risks that likely damaged confidence that would otherwise support the real, i.e. non -financial, economy.
A few commentators seek ways to spur real economy dynamism. They confront conventional inertia – Oren Cass of the American Compass, in advocating government investment in manufacturing, faces the adage that government shouldn’t “pick economic winners.” And, as noted, government development programs face immense barriers in our political polarization.
Some politically-connected ideas purport to combine the best of both worlds, for instance the idea of providing investment funds via new instruments, to preserve environmental assets like rain forests. But those infusions of funds, often to developing countries, raise concerns about national control of national natural resources. It also seems that developing countries may prefer more traditional industrial development – which would generate higher and faster growth in less-industrialized economies.
What should America do? Of course much must play out in actual business and enterprise, and perhaps in political action, if that ever becomes feasible. Key to both will be Americans’ commitment, conscious or subliminal, to the freedom and dignity of our fellow Americans. Investing to grow real economy capacities should carry a moral premium, which starts in the minds of individuals, not politicians’ rhetoric or stockbrokers’ sales pitches. Fiscal stimulus, and political consensus for it, will require political consensus for sustained and systematic public investment rather than politically driven tax breaks or emergency payouts.
Economics and politics in this country still require the sanction of the people – but their preferences are too easily manipulated through our extended institutional and political filtering systems. They become too diffused to take coherent effect. The only corrective to the torpor of enterprise and the dependence on speculators and Fed policy will come from individuals who see value in trying. The best support to our economic animal spirits will come when Americans think in terms of entrepreneurs and consumers rather than interest rates and venture capital. Economic growth needs to serve our dignity, and it is up to us to infuse that ethos into our dealings. This nation exists for people’s right to their pursuit of happiness, for each of us as a free and whole individual, not a blip of consumer demand or a click on a website. Each of us should think of each other as the keys to an economy. This is how we foster trust to build consensus for sound policy and confidence for a sound economy.