Dispelling the gloom

Our economy needs more than a stimulus

it needs a catalyst to shake investors out of their dark mood

January 22, 2009|By Michael Justin Lee

Psychologists have a term to describe a patient's utter inability to experience pleasure: anhedonia. I can't help concluding that the American public is experiencing a debilitating bout of economic anhedonia right now. This mood is antithetical to the American can-do spirit and will limit the efficacy of even the best structured economic stimulus package to come.

It is important to note that the psychological manifestation of anhedonia is called depression. The economic analogy is both clear and ominous.

We're in deep straits, and by way of rescue, one of the largest federal spending programs in history is on its way. There's no stopping this freight train. So let's get it right.

For starters, let's dispense with the word stimulus. An economy that merely responds to external stimulus will quickly revert to its previous unstimulated state once the stimulus is exhausted - for instance, when we reach the eventual limit of our fiscal resources.

This will not do. We need more than stimulus for our economy. For this reason, I far prefer the word catalyst. Maximum bang for our buck can be achieved only if the fiscal package catalyzes a chain reaction of private-sector transactions that outlive the initial impact. In this regard, we must discontinue thinking of the legislation as spending at all, but rather as investment. Ideally, the fiscal catalyst should generate a return on our investment by motivating entrepreneurs with the requisite pluck and resolve to plunge into opportunities created in the wake of the titanic package.

This would not be without precedent. President Dwight Eisenhower's highway project spawned entire companies devoted to the hospitality and travel industries. President John F. Kennedy's space program generated technological developments in consumer electronics that far outlived his administration. President Ronald Reagan's military buildup sparked a revolution in the use of computer technology in American industry.

When economic anhedonia strikes, far worse for the economy than the decline in production is the idleness of the investing class. Capitalists would never deploy their capital if they could not conceive of conditions being better than they are now. In such circumstances, our fiscal program could never advance beyond its initial impact.

But it isn't just the big-buck capitalists who must be lured back to the table. The role of the everyday consumer is equally critical, because matters of production and consumption go hand in hand. What's not consumed will quickly cease to be produced. The overarching goal, then, must be about more than the actual spending itself and be to eliminate the underlying gloom. Three things would help achieve this goal.

First, let us move the discussion about tax relief toward rate cuts as opposed to refunds. One-off stimuli stimulate today, but once spent will not improve anyone's mood tomorrow. Rate cuts, on the other hand, persuade workers that more after-tax dollars will be in their pockets to spend for any succession of tomorrows.

Second, let us encourage capital investment with tax credits. We want employment and investment; businesses want return on investment. So spur investment by reducing a primary hurdle to their attainment of returns. But this feature should be short-lived. In contrast to personal rate cuts, which work best when workers believe they're sustained, investment tax credits work best by being temporary, to persuade businesses to invest more when we need it most - like now.

Finally, as necessary, we must continue to recapitalize the banking sector. No market economy can be healthy unless its financial system is healthy; people need to be absolutely sure that their money is safe. Therefore, some portion of the package should be held in reserve for the rescue of troubled banks.

President Barack Obama has issued a clarion call for change. In his first test, we must hope that he uses the power of his office to change the current mindset and reignite the capitalist spirit within us.

Economist Joseph Schumpeter once described the capitalist model as one that embraces creative destruction. We've had quite enough destruction for a lifetime. Let's get on with the creation.

Michael Justin Lee, financial markets expert in residence in the U.S. Department of Labor from 2003 to 2005, teaches at Loyola College's Sellinger School of Business and Management. His e-mail is mjlee@loyola.edu.

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