From risk-taking to risk-averse

From risk-taking to risk-averse February 21, 2013

Economics columnist Robert J. Samuelson says that the reason economic recovery is so slow in coming and the unemployment rate so high is a shift in the national psychology:

We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending. The inclination was to surrender to immediate gratification. Want a new car? Sure, why not? More meals out? Great idea! Businesses behaved similarly. Banks made the next loan; companies hired the next worker and approved the next investment project. An ever-expanding economy justified optimism, and optimism supported an ever-expanding economy. Hello, bubble.

The psychology has now reversed. The bias is against extra spending. Eat out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent. It could go higher, imposing a further drag on the economy.

Businesses have also retreated. They resist approving the next loan, job hire or investment. . . .

As I’ve written before, this psychological shift stemmed from the fact that the financial crisis and Great Recession were largely unpredicted. Americans aren’t just deleveraging. They’re also building wealth to protect themselves against unknown dangers. . . .

We are hostage to a stubborn, restraining psychology. There’s no obvious fix for slow job growth, precisely because it requires a change in public mood or some autonomous source of added demand — a burst of exports, investment in new technologies — not easily predicted or controlled. It could happen but is hardly guaranteed.

via Robert Samuelson: Why job creation is so hard – The Washington Post.

Is this necessarily a bad thing?  Does an aversion to risk threaten the promises of free market economics?

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  • An eversion to risk is free market economics. People who are free to spend are also free to not spend.

  • Klasie Kraalogies

    Not spending money means the economy grinds to a halt (BAD). Spending too much means bankruptcy (BAD).

    Balance, with calculated risk is the way to go.

  • DonS

    Deleveraging is good stewardship. The government should try it.

  • sg

    “Banks made the next loan”

    Um, only if they were sure they could turn around and unload them quickly by selling them outright to Fannie and Freddie or as packaged securities mislabled as AAA. So, no not much risk there and lots of up front profits. They were profitting from other people’s risk taking. Banks weren’t putting themselves at risk. Also, the people at the top of the banks also have friends in high places who helped them avoid taking losses or passed losses onto taxpayers.

  • Samuelson sees what’s going on, but he’s misinterpreting it to view it as a bad thing. The fact of the matter is that he’s pointing to 1982–the start of Reagan’s really good years–and its 10.2% savings rate as a bad thing.

    However, if you take a look at economic growth versus the savings rate, you’re going to be hard pressed to correlate it to any stagnation, because another name for “savings” is “capital formation.” For example, 1982, while being the peak of unemployment at about 9.7%, also was the start of the Reagan economic boom.

    Put another way, people take calculated risks, and if you’re calculating the risk of starting a new business or expanding it, it really helps if you’re not carrying an armload of debt.

    Now if we can only persuade the President and the Senate that having a profitable enterprise is not a bad thing, and end their war on job creators, it could be 1982 all over. Or, if Mr. Obama gets his way, we could have 1937 all over.

  • sg

    I am betting that emotionally insecure people are voting for another 1937. These are folks who are willing to give up freedom for security and will therefore have neither.

  • Grace

    ➠ Bike @ 5 makes the point:

    “Put another way, people take calculated risks, and if you’re calculating the risk of starting a new business or expanding it, it really helps if you’re not carrying an armload of debt.

    You bet. Too much debt, will inhibit one from getting an SBA loan, or any other loan. Banks aren’t loaning individuals money, who are heavily leveraged, or have little to any collateral, be it savings, or a residence that has lost substantial value, or any other property.

    Paying off credit cards, avoiding auto payments, is the smart way to avoid risk. Add to that, buying a home or condo that you can actually afford, even a bit less – it’s good insurance. You can always buy UP, down the road, when the financial situation is much better, and you’ve put money away, i.e. savings. Don’t bet on the future, that’s how most of these people, no matter how wealthy they ‘were, are now suffering because of their betting on the future.