Optimism and Confidence: Rocky Balboa for President

Despite friends discouraging him from returning to the ring, Rocky Balboa says “it ain’t about how hard you hit, it’s about how hard you can get hit and keep moving forward and that blaming others won’t help.” There have now been six Rocky movies but the theme is often the same. Rocky shows confidence and optimism in the face of adversity. Imagine if Rocky has not been so confident. Imagine if the football coach at halftime told his team – you guys are really bad and there is absolutely no way you will ever catch up to that other team. Let’s go get a JD.

Sports stories are filled with successful comebacks. So is life. Back luck or poor judgment knocks you down. And then you dust yourself off and get back up and try again. Confidence and optimism are central to that process. Without it, we languish and remain in difficult territory. Even if we get a boost up from an external source – it takes a positive outlook to keep it going.

I think the above is something most of us believe. It is common sense. Without confidence and optimism it is hard to understand how things get done. Imagine thousands of entrepreneurs each day complaining and moaning how they have no chance of succeeding. Imagine scientists and engineers confronting each day pessimistically.

If all the above is common sense, then it makes me wonder why our national policymakers cling to unnecessarily pessimistic scenarios about the US economy. The press says that Bernie Sanders brilliantly outlines the failures of capitalism and the needs for government to save us from a sad economic future. The Fed clings to stories about how the US economy remains so fragile that it could not withstand a 20 basis point increase in interest rates. Recent stories last week reported Census income figures showing how economic performance since the last recession has been stagnant. Hello! All these folks want you to be pessimistic about the US economy.

Why? I don’t know but I can offer up some guesses. Each party wants to blame the other one for the lackluster growth. Each party will out-shout the other in claiming the other has destroyed America. As for the Fed – they want to blame China or Greece or anyone – and pretend that they continue to be the only real hope for the US economy despite a continuing policy that exaggerates imbalances and creates at best substandard growth.

Someone asked me the other day what I would do if I was Janet Yellen. I said I would quit frowning and perhaps wear more red. I would look the camera straight in the eye and explain why we people in the US are the luckiest people on the planet. And then I would recite every good thing about the US economy. And then I would say – I am going to raise interest rates today BECAUSE the US economy is so strong. Yes, the US economy is strong and it can withstand a meager 20-30 basis point increase in rates.

This is the kind of thing Rocky Balboa heard in his head when he stepped into the ring against a very tough opponent. Rocky’s emotions soared and he was confident that he could win. Yes, Yellen can look at the economy and find worrying trends. But surely there are many positive trends that support economic growth and strength.

John Maynard Keynes understood confidence. Keynesian economics grew out of two ideas that had everything to do with confidence. The so-called liquidity trap meant that the Fed was unable to make policy succeed simply because people believed Fed policy would fail. People held on to money instead of spending it. Does that sound familiar? This is why Keynes was so skeptical about using monetary policy.

Keynes preferred Fiscal Policy. He preferred it because of what he called the low value of the marginal efficiency of capital. He said the MEC was low because of external factors that were keeping buyers away from spending. A low MEC meant that firms were unwilling to buy more plant and equipment. They were pessimistic about the future. Keynes believed that a temporary increase in government spending would raise spirits. The government is here to help. In the Great Depression this might have made sense. He believed that a temporary injection of spending by the government would improve the MEC and firms would expand productive capacity, increase employment, and then generate more income and spending.

That was then. Since that time when Keynes believed in optimism about government spending we have had government deficit after government deficit. Government has grown much faster than the economy. We find ourselves in 2015 with a very large government and an even larger government debt with absolutely no plans to reduce it. Today people have come full circle. Today many people get more pessimistic when they hear that the government is coming to the rescue.

There is a very strong macroeconomic case to be made now that says that monetary policy will not work because of the liquidity trap and fiscal policy won’t work because it will have a deleterious impact on the MEC.

We have had a nice half century or more of Keynesian experimentation. While we have people like Paul Krugman and Bernie Sanders who think we need even more of that experimentation, we have a growing number of people who understand that Keynesian policy has become the problem rather than the solution. Lack of success in the years since 2009 created skepticism about even more of the same kind of policies. And that skepticism actually dooms future attempts at monetary and fiscal policies as people just sit on their money.

So where does that leave us? First, the Fed needs to eliminate the liquidity trap. The only way to do that is to mop up all that money they spewed. Second, the government needs to raise the MEC. Today the way to raise the MEC is to create a more positive outlook among large and small firms alike. The government needs to stop perpetuating a myth that says that workers lose when firms gain. Emasculating firms is not the best way to increase jobs and raise wages.  If it was the best way, we would all be living in Cuba and Venezuela. Take that Bernie Sanders!