Some say Americans’ cautiousness is not just a result of the “burn” of the Great Recession; and that in actuality, for a generation, Americans have slowly been showing that their penchant for risk-taking is in decline. A recent Wall Street Journal piece (“Risk Averse Culture Infects U.S. Workers, Entrepreneurs”) points out four trends, observable since the 1980s, that show a loss of risk-taking psychology -- and these confound some recent analysis that would pin blame either on the aftermath of the financial crisis and Great Recession, or on the epochal shift inaugurated by Baby Boomers’ retirement.
Are U.S. Companies, Workers, and Entrepreneurs Still Waiting to Take the Risk?
Pining for “Creative Destruction”
First, the pace of ongoing job creation and destruction has slowed. Since the 1980s after each economic recession, employment levels have been increasingly slow to return to pre-recession levels. Before the 1980s it took on average about 20 months after a downturn was over for employment to return to its pre-recession peak. On the other hand, after the July 1990 to March 1991 recession, it took 32 months. After the March 2001 to November 2001 recession, it took four years. Now, four years after the end of the Great Recession, we’re still not back to pre-recession employment levels. Companies aren’t expanding their payrolls even though times are clearly better; businesses would rather sit on cash than risk further expansion.
Second, investors are increasingly less willing to back startups. Venture capital investment in the U.S. is down 10 percent from last year, according to PricewaterhouseCoopers; and the broader trend shows that since the mid-1990s, the
proportion of venture capital going to new firms has declined sharply. Further, the destinations for venture capital show a similarly sharp contraction in sectoral diversity -- with Silicon Valley now soaking up some 40 percent (up from 30 percent in the run-up to the bursting of the tech bubble). This sectoral spread reflects a growing regional divergence in startups, entrepreneurship, and job creation. Boston and San Francisco, and some landlocked cities, may show high rates of productive risk-taking, but they are increasingly pulling ahead of the rest of the nation.
Third, as noted above, startups in general are down, which is a negative for employment, as new companies have been shown to be the best of all engines for employment growth. According to the Journal, in 1982, half of American companies had been in business fewer than five years. In 2011, that figure was down to a third. Workers employed by new companies fell in that time from 20 percent of the workforce to just 11 percent. This shift reflects a growing dominance of larger companies: in 2008, for the first time, there were more workers employed by large companies (> 500 employees) than in small companies.
Chart source for image on right: Wall Street Journal
Workers Less Willing to Move Their Residence to Get a Step Up
And corresponding with these corporate and entrepreneurial trends is a resistance of the American workforce to migration and to frequent job changes. The landscape of unemployment after the Great Recession shows significant divergence, with states such as California, Nevada, New York, and much of the south showing sharply higher unemployment rates than the Dakotas, Texas, and Virginia. However, the fact that the epicenter of the crisis was in mortgages and home values have made it difficult for underwater homeowners to pick up and move in the historically typical American way. The rebound in the housing market may free up some of this workforce. But even so, census data show that the inter-state migration rate has been falling for 20 years. Further, workers are less likely than ever to willingly leave their jobs and find another. Just as the makeup of the corporate landscape has shifted from startups, the makeup of the workforce has shifted from job-hoppers. Last year 53 percent of workers had held the same job for more than five years, up from 46 percent in 1996.
Regulation Everywhere
If the Great Recession and the exodus of the Baby Boomers can’t account for the longstanding nature of these trends, we’re left looking for other reasons, and we have a few ideas. One that comes to mind is the apparently inexorable growth of the regulatory environment. The 2012 Federal Register -- the compendium of effective and proposed Federal legislation -- reached 79,000 pages, a few pages behind 2010’s record 81,000. The Competitive Enterprise Institute estimates the total economic cost of Federal regulations at .8 trillion a year. In addition, there are regulations promulgated by state and local government. The increasing scope of regulation has, in part, the effect of imposing large barriers to entry for smaller firms. These barriers include both the costs of navigating the compliance maze, and the benefits that accrue to the firms selected as contract beneficiaries of the state’s largesse. Established, large firms are protected and secured, and smaller new firms -- the ones whose dynamism would create employment and GDP growth at a higher rate -- are being squeezed out.
Productive Risk Taking or Speculative Risk Taking?
A second possible root cause of the apparent decline in entrepreneurial vigor hinges on a distinction between different types of risk taking. Clearly, risk-taking of one sort was a key element and root cause of the 2008 financial crisis, with the high leverage of exotic and opaque derivatives contributing to a near systemic collapse of the financial system. This speculative risk-taking is fundamentally different from the risk-taking shown by an entrepreneur driven to bring his new product or concept to market.
Combined with the moral hazard created by an explicit or implicit public backstop of the speculators, the lucrative nature of these leveraged risks has allowed them to capture a disproportionate share of the “entrepreneurial spirit.” For years, the proportion of new graduates going into finance, rather than, for example, STEM fields (science, technology, engineering, and mathematics), rose steadily. The post-crisis period has seen only a slight remediation of the pattern. The rise to dominance of a business culture geared towards speculative risk taking since the 1980s has been detrimental to the U.S. business’ traditional culture of entrepreneurial risk taking. We continue to look for signs that there exists the political will to implement effective reform of the shadow (or “parallel”) banking sector and the reduction of the systemic risks posed by financial derivatives.
In the meantime, we will focus our efforts on the sectors and businesses (especially tech and energy) where we see that the entrepreneurial spirit is still alive and well. Regional and sectoral concentration may be a trouble some pattern for the U.S. economy as a whole, but for an investor, it is simply another factor to take into account in the search for productive opportunities. In spite of the risks, there will be many such opportunities to be found over the coming year.
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