The Animal Spirits of Capitalists

John Maynard Keynes argued that the business cycle was a function of the animal spirits of capitalists, the bull and bear moods of large financial investors. Writing during the great depression, Keynes was skeptical of the pure free market system that yielded deep three long depressions (including the great depression) before World War II. The eocnomic sytem that was founded on his economic theories made an effort to buffer the foul mood of the market with government intervention and regulation.

Many Americans, particularly those with great wealth, believe that these moods and their corresponding impact on markets are the most efficient way to run an economy. This religious belief in the unfettered invisible hand of the market went underground for three decades after the great depression. But the seeds of the unraveling of the new deal started with a handful of libertarians who met in the apartment of literary giant Ayn Rand in New York City that included Alan Greenspan.

Eventually, these libertarian views became mainstream. Greenspan became chairman of the Federal Reserve Board and far right economist Milton Friedman became the dominant mind in American economics for over a decade.

Today, the tables have turned and the excesses of the market are again obvious. Greenspan, writing for the Financial Times confessed that perhaps the self-interest of finance capital and that of the economy as a whole are not the same.

“In August 2007, the risk-management structure cracked. All the sophisticated mathematics and computer wizardry essentially rested on one central premise: that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring their firms’ capital and risk positions. That premise appeared incontestable but, in the summer of 2007, it failed."

Stimulate the Economy - Reduce Budget Cuts with Progressive Taxes

While we are starting to see the bottom, we are still in the deepest recession since 1980-82. State budget cuts are likely to make it worst and postpone or even weaken the recovery.

When tomorrow's Senate budget comes out and the House budget comes out Tuesday you are going to see job losses of 10,000 state workers, including 3,000 teachers and 3,000 college faculty. Low income people will be cutoff services, and mentally ill and disabled citizens will lose benefits. Cuts that could cancel out the economic benefits of the Obama stimulus package in Washington State

The recession has gotten this bad primarily because consumer and business confidence is shaken and people are holding onto their money. Instead of spending they are saving. To get the economy moving again, they have to start spending.

One way to mitigate the impact of state budget cuts on consumption is to reduce the cuts by raising taxes on upper income residents. This makes a lot of sense from an economic perspective. You tax high saving people who are sitting on their money and not spending it and use it to restore cuts to high spending, no savings people. The ultimate impact is greater aggregate demand and fewer job losses.

A 3% tax on income of individuals making more than $250,000 per year could raise over $1.5 billion. The tax would hit only the top 4% of taxpayers and it would still be a lower tax on that income group than any of our surrounding states. The people's republic of Idaho taxes it's richest citizens a rate two and half times as high (7.8%) and the top tax rate in Oregon is 9.0% and in California 9.3%. Our tax would in fact be one of the lowest taxes on the rich in the country. It's worth thinking about.