Our Risk Averse Culture

Those who read this blog religiously know that I have attributed some part of the worldwide Covid panic to an inability to accept risk. Political leaders from New Zealand to Australia to Great Britain to America refused to accept any risk. They preferred to shut everything down, to force everyone to vaccinate and to mandate the wearing of useless masks.

Behind it all was excessive risk aversion. No risk was acceptable to our political leaders. And, for the most part, we acquiesced. Those who did not were severely punished.

Now, economist Allison Schrager, of the Manhattan Institute, has written a more detailed and entirely cogent analysis of our civilizational inability to accept risk. To be fair, she has been writing about this issue for some time now, so we grant her kudos for having been there first.

Her thinking correlates largely with my own, with one exception. I have mused, in this blog, about the possibility that we are more averse to risk because our civilization has granted more and more power to people who are naturally less inclined to take risks. Those people are-- women. 

So, girlpower, nations where strong and empowered women have taken more and more authority have naturally become more risk averse.

Aside from that point, one is happy to present Schrager’s analysis:

Americans have become intolerant of many risks that people once dealt with on a daily basis, as the Covid-19 pandemic has shown. Even 20 years ago, retreating to our homes for months on end at the government’s urging for a virus with Covid’s risk profile would have been unthinkable. We’ve often heard during the pandemic that we can return to normal “when it is safe.” Indeed, we hear the word “safe” a lot these days, but it’s often an unrealistic standard that no previous generation expected. Certain Covid restrictions can be justified, but extreme risk-aversion from government bureaucrats has caused more harm than good—for example, shutting down in-person teaching for children, who were at low risk from the virus, or imposing draconian economic lockdowns that caused many businesses needlessly to fail.

Well said, and thoroughly correct-- by my lights, at least.

Schrager then analyzes of the role of risk in economic life. A strong and vibrant economy requires people to take risks. A weak and decadent economy discourages risk. One will add here, as one has said before, that one of America’s greatest current risk takers, by name of Elon Musk, also counts among those that most Americans admire most.

And yet, Musk is rowing against the current. And he is building his next large plant in Shanghai. 

Schrager names government bureaucracy and a bloated legal system as the culprits here. They do everything in their power to reduce risk and to stifle economic innovation:

Risk is critical for a flourishing society and vibrant economy. Investors and entrepreneurs must take chances to find new innovations. Individuals need to do so as well, in order to achieve their personal and economic potential. If well designed, regulation can help us balance risk and reward sensibly. But our goal as a society seems more and more to be reducing risk at all costs.

It’s the bureaucracy, stupid. Or better, it’s the Nanny State:

A bewildering tangle of federal, state, and local housing, business-licensing, and health-care mandates is making it harder and costlier to move to a new city or to change jobs and rendering entrepreneurship untenable for many Americans. Entrepreneurship and openness to new opportunities once fueled America’s economic dynamism, but now the government is becoming our risk inhibitor, a collective helicopter parent.

Happily for Schrager’s argument, we can quantify the war against risk:

Between 1970 and 2019, the page count of the federal code of regulations on business and industry thickened from 54,000 to more than 185,000. State and local regulations can be even more of an economic burden, especially for small businesses. The number of jobs that required a license, for instance, rose from 5 percent in the 1950s to 22 percent today. Small wonder that the rate of new business creation fell 10 percent between the 1980s and 2018. Other factors influence this decline, including an aging population and changing market structures that reward larger firms, but surveys from the National Federation of Independent Business consistently rank regulatory compliance as a top economic concern. An example of the state and local bureaucratic obstacles that someone launching a small business can face: San Franciscan Jason Yu recently spent over $200,000 seeking permits to open an ice cream shop in 2019, before giving up in frustration.

And then we have the activities of the Federal Reserve, whose current role seems to be to reduce investment risk. In other circles it’s called the Fed put. 

The Federal Reserve, for example, increasingly aims not just to take the edge off inevitable recessions but also to keep its policies (or even public discussions of them) from sinking the stock market. This distorts the price of risk and our perception of it—and capital then flows to riskier places, leading to new vulnerabilities in the economy. The Community Reinvestment Act of 1977 and subsequent iterations of it sought to boost homeownership by subsidizing mortgages and lowering lending standards, giving Americans a means of building low-risk wealth and security—or so the legislation’s backers argued. But the measure distorted the price of risk in the mortgage market, helped inflate a dangerous housing bubble, and—when that bubble burst in 2007—left many families worse off because their wealth was trapped in an illiquid, over-leveraged, and now-depreciating asset.

As for Build Back Better, the Biden plan that has recently suffered an ignominious defeat in the United States Senate, Schrager remarks that it is designed to reduce risk, and thus to reduce entrepreneurship:

It took a pandemic for people to start quitting their jobs again and forming new businesses, but government policy is working against these salutary trends by piling on risk protections. The Biden administration’s Build Back Better plan aims to make gig work harder, heavily favors unionized workers, adds more wage floors, and introduces more constraints on the economy. But such policies will only reinforce the stagnation and inequality that progressives claim to be concerned about.

And then there is the psychological side of the question. When people are not allowed to take risks they are effectively being infantilized. It makes good sense when you consider that our Nanny State, New York’s very own Governess Kathy and the heads of the teachers’ unions have decided-- in the name of risk aversion-- that people should be deprived of their ability to make their own judgments:

Risk aversion is holding many Americans back in noneconomic ways, too. Psychologists believe that taking chances and confronting uncertainty are crucial to personal growth and our sense of dignity. Without them, curiosity dims and a work ethic can seem pointless—why leave your parents’ basement? (This is why unconditional cash benefits from the government are a bad idea.) Social psychologists such as Jonathan Haidt have argued that helicopter parenting, which keeps kids from taking risks and handling inevitable setbacks, is one reason that some college students have become more anxious and think that the mere expression of certain ideas can actually harm them.

Today’s young people, brought up coddled and swaddled, cannot imagine taking risks. Worse yet, Schrager says, they are so thin skinned that they cannot suffer the least discouraging word.