When you create incentives to drive risk-taking, this draws the best talent into entrepreneurship and innovation. The only way you do that is to create an inflated payback for those who take risks, innovate, and build something amazing.
That’s why the United States has remained ahead of Europe and Japan these past decades: we offer bigger payoffs to the people who take risks.
This economic reality goes beyond mere rewards, though. Having more money to invest encourages risks at the front end of the venture, too. People look for simple answers, but economic issues are like everything else in life involving people: they’re complicated. Financial incentives are about giving people greater risks and greater rewards, because both of those give the advantage to the smartest, hardest-working, and best.
When you put more money into the hands of the risk-takers, they have more equity to risk on business ventures. When a person has more equity in a financial endeavor, that person is going to take more risks to see it succeeds. Innovators have more at stake, so they work hard to avoid failure.
They say the best players in sports don’t exert and excel because they enjoy victory so much more, but because they fear and hate losing so much worse. Fearing to fail causes people to make herculean efforts.
Winning is a habit; losing is a habit; but the more you have invested in what you strive for, the more you’ll fear failing.
Creating incentives is a long-term way of increasing the probability something good is going to happen. Most business ventures fail. Visionary projects and creative innovation have a large amount of serendipity to them. You’re trying to put together a jigsaw, but most of the pieces don’t fit together the first try.
The more hands you have trying to piece together the puzzle–and the more dexterous those hands are–the more likely the probabilities work in your favor.
Play the odds and you’re much more probable to succeed than if you try to quell the capitalist spirit with economic equality. That sounds great in theory, but has been proven to be a failure for all of us over the long term.
Doesn’t This Lead to a Boom/Bust Economy?
Yes, we’ll have boom and bust periods in the country’s economic life. It’s better than 10 straight years of slow growth, though. Boom-bust is a whole lot better than bust/bust. That’s what we’re talking about here. Long recessions have a destructive effect on the economy that get worse the longer they last. It’s like having tooth decay or a chronic condition. The longer you delay cleaning out the rot and encouraging the healing process, the more of your body is affected. The economy is like a medical patient right now.
Once we get our finances turned in the right direction, we can worry about avoiding a bust. Right now, let’s get the fire of economic production going.
Should We Encourage the Banks to Spend?
Absolutely. When the banks are hoarding money, they aren’t pouring money into investment or consumption, which are the only two ways to prime the economy: increasing supply or demand. When cash sits in the bank vault, neither of those is happening.
First, laws should be written that force banks to hold more capital. That would mean they would suffer when they lose on loans, meaning they’re going to be more careful about loaning money than they were leading up to 2008. Create an insurance system for these losses that are subsidized by the public, then force one bank to pay more for insurance if they’re accepting riskier loans. Also, raise the visibility of the risk-taking the banks.
Transparency is a key for a market economy. Investors can’t make sound business decisions if they’re being misled by the people and companies they’re investing in. A healthy market is one where the facts are out there and undisputed. You’ll always have risk in the capital markets, but as much effort should be taken as possible to assure the smartest and most insightful investors win.
What about Maintaining a Middle Class?
Everyone agrees we have to protect the “middle class”, but the two parties can’t agree on their definition of what middle class means. Every working American likes to think they’re in the middle class, yet that can’t be if we all agree it’s shrinking. Liberals say the middle class shrank during the Bush years because tax cuts for the rich forced the federal and then state governments to shift the tax burden onto the middle class. Conservatives say Obamacare is nothing more than a clever ruse to place higher taxes on the middle class.
I entirely believe that both sides believe those arguments and cynicism or corruption aren’t driving their motivations. It’s just that the right-wing people believe that helping the bosses grows the middle class, while left-wing people believe that helping the workers grows the middle class. The entire political history of the past 100 years can be explained by that last sentence.
Figuring out how to maintain a middle class is so hard, because the price of health care and insurance is squeezing people who used to have these benefits paid by their life-time employer. With more businesses limiting benefits, they’re pushing the cost onto the public. The more people without insurance get sick, this raises the price for the rest of us. If we can get insurance prices under control, the middle class should be able to take care of itself–again if they’re smart.
That only happens if we continue to grow the economy. When the USA is the leader in innovative thinking, business, and technology, we’ll continue to increase the wealth of the nation.