Money is not circulating as rapidly as it would if business and consumers had more confidence. After policy leaders scared the public by declaring that the US was teetering on depression, spending and hiring was instantly reduced. Reacting to the economic slowdown, the government gave cash rebates, tax credits, tax breaks, unemployment benefit extensions, unbelievable amounts of money in infrastructure spending, grew many programs, gave banks free credit and funded massive “quantitative easing” in order to jumpstart the economy with additional capital flows. After all that, business is still not hiring and consumers are still saving their money.
“You can lead a horse to water but you can’t make it drink.”
If you don’t know if you are going to be making money in the future, you will be extra careful not to spend the money that you have. It does not matter that you have enough money to continue spending as you had been spending. What matters is your perception that you might not have money in the future. Human behavior, or “animal spirits” as it is called in by some academics, is an essential component in markets and in the economy. In the markets, animal spirits can be reflected by fear and greed. In the economy, perception of wealth and confidence in the economy are animal spirits that drives demand.
Perception becomes reality in human behavior. For example, reputation may be more important than someone’s actual character. Developing a brand seems to be as essential as executing a business plan. Communications experts counsel that it’s not what someone says or how they say it that matters as much as how they engage with their audience. Animal spirits are all about feelings.
Animal spirits are ultimately reflected in the need to survive. Politicians will do what it takes to get re-elected rather than be controversial and cut spending. Consumers will save their money in case they may not earn enough in the future. Companies will avoid borrowing money and hiring employees in case the economy does not improve.
“It don’t mean a thing if you ain’t got that swing.”
Policy makers need to appreciate the critical role of animal spirits in markets and the economy. People need to trust and believe in strong markets and a strong economy in order to have the confidence to get money circulating rapidly again, which will keep the economy prosperous. To draw on a scene from “Animal House,” the iconic movie about animal spirits, when everything seems as bad as it can get, it’s time for a toga party. It’s time to get in the right spirit.