Do Americans Take Risk Anymore?
- Posted by Jeff Carter
- on June 4th, 2013
Yesterday’s Wall Street Journal had an interesting article on risk taking. If there is one thing in this world that I understand its risk taking. When I was 24, I quit my corporate job to make $150/wk as a runner on the floor of $CME. I traded for 25 years with only myself to bail me out if things went awry. Sometimes they did. It’s walking a tightrope without a net. Now I invest in startups. Same thing.
Risk taking is an integral part of American DNA. When Columbus “found” the continent, he took a risk. When the settlers came, they took massive risk. There was no turning back-it was life or death. Many did pass away. The Revolution was a risk on a massive scale. It was a binary outcome-freedom and independence, or stiff retribution by another country imposing its will upon them. The revolutionaries would have been shot, or hung. Or, if the king was feeling charitable, spent the rest of their life as a prisoner. America wouldn’t be here without individuals assuming risk.
There are significant trends that are sapping the risk taking ability of the United States citizenry.
One data point that the Wall Street points out is our population is older. Older people assume less risk because they have more to lose. That’s why younger people do a lot of the startups. Ironically though, it’s the older people that should be taking on a little more risk. They have a lot of expertise and knowledge about individual business sectors. Many times, they can transfer that knowledge into a scalable business. In addition, they might have the financial wherewithal to bootstrap the business along for a longer period of time. If the business fails, it doesn’t hurt them as much because they have something to fall back on.
Companies are taking less risk. “Companies, too, are taking fewer risks. Rather than expanding payrolls, for example, they are keeping more cash on hand—5.7% of their assets at the end of 2012, up from under 3% three decades earlier, said the Federal Reserve, a rise that accelerated after the recession. Workers are hired more slowly, particularly at newer companies, Labor Department data show.”
This is purely because the economic incentives don’t line up correctly for them. The government sets those incentives. High regulation, high taxes, and the decision in the trade off between investing in more capacity and holding cash point to holding cash. Obamacare and other government mandates make it very expensive to hire more employees. Overwhelmingly high corporate taxes create cottage industries within companies that try to keep from being taxed instead of using that brainpower to innovate. Change the incentives and company behavior will change.
Younger people with little to lose and exposure to new technology innovate a lot of great companies. But those same young people today as a group are assuming crippling student debt. When a person is in debt and has a large monthly nut to pay out, they can’t use that cash to buy the resources to start companies. Younger people are also less educated than people twenty and thirty years ago. Our system of education is so broken and doesn’t prepare them for life. Many times, their real education starts at graduation.
As we raise our children, we have indoctrinated them with politically correct concepts that detract from risk taking. Everyone gets a trophy. Everyone is special. We haven’t taught them that it’s okay to fail. Learning how to deal with, and accept failure is an essential tool if one is to be a great entrepreneur.Instead of embracing differences, the politically correct movement steamrolls them over and injects a feeling of guilt into the mindset of the individual.
Government programs designed to give people a standard of living also take away from risk taking. I had a trader friend tell me once that, “Thank God when I graduated government didn’t give me a trailer, some shade, and unlimited supply of beer. I might have never left.”.
Government programs make the trade off between working for a living in a productive job and just existing to cash a check tilt in favor of cashing the check.
In 39 states, welfare pays more than an $8-an-hour job. In 16 states, the welfare package is more generous than a $10-an-hour job. In Hawaii, Alaska, Massachusetts, Connecticut, New York, New Jersey and Rhode Island, welfare actually pays more than a $12-an-hour job-or 2-1/2 times the minimum wage.
In eight states, welfare pays more than the national average first-year salary for a teacher. In 28 states, welfare is more generous than the starting salary for a secretary. In 46 states, welfare recipients actually make more than full-time janitors.
That’s one major reason why there is less risk taking and entrepreneurship in the US.
Many cite loss of health care benefits if a person leaves a job. Obamacare is supposed to remedy that-but it won’t. Socialized medicine is not the answer. Recall that the only reason that health care is tied to employment at all is because FDR put a limit on how much people could earn during World War Two. Health benefits became a way to compete for talent, since they were considered monetary renumeration. If we want more risk taking in the US, we need to repeal Obamacare and come up with a new way to allow everyone to have access to healthcare without tying it to employment. A voucher system with competitive markets would be a great start-and would pave the way for a lot of innovation by itself.
Lack of immigration is also cited. It’s hard to get into the United States. But, who sets immigration policy? There is a radically different immigration program that would attract thousands of new entrepreneurial immigrants. They would come here, start companies and grow our economy. But, government wants to pick and choose who gets a golden ticket to enter the US. Ask Gary Becker.
The governmental systems at federal, state and local levels has also become a regulatory albatross on innovation. It can be exceedingly challenging to startup a business. Large government begats large multinational corporations-because only they have the resources necessary to deal with government. As a country, if we truly believe in individual freedom, “Freedom to Choose”, then we need to radically shrink the size and scope of our governments to make room for individuals to innovate solutions to problems.
The recent IRS scandal is vey frightening to a would be entrepreneur. What if government got a hard on in the business sector I was building a business in? If my business became a marked man, government could put me out of business. Think I am crazy? Ask Gibson guitar.
Risk taking rewards America in more ways than just an improved economy and quality of life. If you learn the lessons from World War Two, it was the individual risk taking of American soldiers that won the small battles against incredible odds. Our army wasn’t as well trained, or well armed. But, we had people with that American spirit instilled into their characters. Our enemies came from big centrally planned systems that punished risk taking. Ask Jimmy Doolittle.
America hasn’t lost it’s mojo. It still exists. I work with entrepreneurs from all walks of life every day. The problem is that our government is too big and the incentives it mandates on the marketplace detract anyone from trying. The American people are making a rational risk/reward decision. The answer is to change the incentives, and the calculation will change.
Don’t lose hope yet.
thanks for the link Instapundit
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
Becker Posner Blog
Ben Horowitz Blog
Betting the Business
Black Line Review
Blue Sky Innovation
Both Sides of the Table
Business News Network
Chicago Booth Graduate School of Business
Cooler By The Lake
Daily Economic Release Calendar
Doug Ross @ Journal
Economics of a POW Camp
Foundation for Families
Garden and Gun
George Stigler Institute
Good Beer Hunting
Great Food In Chicago-Steve Dolinsky
Hyde Park Angels
Illinois College of Business
John Taylor's Blog
Legal Issues in Angel Funding
Macroblog-Federal Reserve Bank of Atlanta
Microbrews in Chicago
Mike And G
Milton Friedman Institute
National World War Two Museum
Notes From Underground
Ronald Coase Institute
Senate Banking Committee
The Alpha Pages
The Big Picture
The Clubber Fund
The Daily Crux
The Grumpy Economist
The Jack B Show
The Minimalist Trader
The Musings of The Big Red Car
The Polsky Center
The Streetwise Professor
Tough Love Marketing
US Federal Reserve Bank
US House Financial Services Committee
World War Two Blog