« More College | Main | Sting »

Risky, Risky

Mads Kvalsvik, who I take to be Scandinavian, had a nice post expanding on my little risk note from earlier that makes me want to say more on the subject. In general, it's an excellent thing when people take risks. As Mads writes, the really valuable thing about becoming fairly well-off in America is less that it lets you buy a bunch of stuff than that it cushions you against risks. This lets you take risks, and with risks there tend to come rewards. This is true in a variety of areas from investing (where stocks give you higher payouts in the long run than alternatives, provided you can withstand the short-term turbulence), to career choices, and much, much more. This is something that, I think, the right broadly construed usually does a good job of understanding. One of the main sources of American dynamism is the willingness of people to shoulder risk.

Something that the right doesn't understand well at all is the difference people designing policy that let people take more risks and policies that simply make life riskier. To take a good example, one leading cause of America's relatively entrepreneurial business environment is that we have bankruptcy laws that are relatively un-punitive compared to what you have in many other countries. This empowers people to take risks by making it less risky to start a new business by taking out a loan. One of the things Social Security does is by guaranteeing everyone a viable, yet modest, retirement income is to allow people to make relatively risky choices with their personal savings, secure in the knowledge that if the worst happens Social Security will be there to tide them over. What's needed are plans that spread this risk-taking capacity further down the income chain, not plans that simply force people into risky situations.

Health care is probably the leading area where liberal policy ideas could help on the risk front. In a normal country with universal insurance, leaving your job and spending a bit of time looking for a new one or working as a self-employed person would be no big deal. In the United States, it exposes you to a massive risk of a catastrophic medical mishap, and if you already have health problems could make it essentially impossible for you to ever acquire insurance again. In this way, America's failure to collective health risks makes each individual more risk-averse than we would be under a different system, bringing with it attendant limits on our flexibility and economic dynamism. In Europe, the potentially risk-enabling impact of universal health care tends to be canceled out (and more) with a variety of labor market regulations that I wouldn't want to see us emulate. In that sense, talking about whole "social models" can be somewhat misleading, since every country has a bunch of different policies that tend to push and pull in conflicting directions. Relatively few Americans would like to see this country be more "like Europe" in a holistic sense, but I think the mildly social democratic policy agenda that US liberals like can be credibly portrayed as a good way to more fully realize America's self-conception.

December 21, 2004 | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8345160fd69e200d83457635669e2

Listed below are links to weblogs that reference Risky, Risky:

» Social Security and Risk from Deinonychus antirrhopus
I know I've been blogging about this alot, but it does seem to be the current topic in the blogosphere. The latest is from Matthew Yglesias who apparently hasn't read many of the plans to privatize Social Security. One of the Left's favorite ways of de... [Read More]

Tracked on Dec 22, 2004 1:03:55 PM

Comments

What regulations in Europe are you talking about?

Posted by: Brian | Dec 21, 2004 4:16:13 PM

I think MY is right on this. Another thing on the cultural side that I see is becoming more and more common is that of an increasingly affluent middle class subsidising more risk in their young adult offspring. Young adults can try things and if they fail have access to parental resources to regroup and try something else. You often see newspaper articles critizing such practices but I think it is a good thing overall.

Posted by: joe o | Dec 21, 2004 4:33:59 PM

Grover Norquist and Co. WANT the risk levels to be higher for all non-affluent Americans. They want more to fail, and more to crash down to poverty. They are attempting to return to the US to the way it was shortly after the Industrial Revolution started, with enormous wealth and power concentrated in the hands of a few and all the risk and consequences distributed to the majority of citizens.

And as far as I can see, they are succeeding.

Cranky

Posted by: Cranky Observer | Dec 21, 2004 4:38:06 PM

Relatively few Americans would like to see this country be more "like Europe" in a holistic sense

Actually, that's almost certainly not so. Many, many Americans -- probably a very solid majority -- would like the US to have the economic policies of Europe. Most polls on economic issues show this.

However, such policies would be extremely unpopular with America's upper classes, both the Republican and Democratic variety. Which is why the US is off the spectrum of the rest of the industrialized world.

Posted by: A Tiny | Dec 21, 2004 4:45:01 PM

There are a couple of reaons why the US is "off the spectrum".

The constant inflow of poor immigrants have ensured that the minimum wage will remain relatively low.

The immigrants are happy to work for less and the employers are happy to pay less. But it screws over the poor Americans that can never get unions to work properly.

Unions, socialism and the derived social democratic policies have never taken hold in the US for this reason.

In the much more homogenous European societies unions are much easier to organise.

(this is not to say that unions are nescesarily a force of unambigous good, but they are the first step on the ladder to the welfare state)

-

Another important issue is that social stability is important for longterm stable growth. Investment is easier if you can safely predict the longterm flow of events.

The European states (or at least EU15, different as the they are) probably prosper some from this fact.

G

Posted by: Grosbøl | Dec 21, 2004 5:10:00 PM

immigrants are not happy to work for less, no more than you are

Posted by: abb1 | Dec 21, 2004 5:12:02 PM

"Which is why the US is off the spectrum of the rest of the industrialized world."

And why our GDP per capita leaves theirs in the dust?

Regarding the safety net that allows for risk taking, there is an effect produced by the safety net that runs in the other direction, too.

Why don't people voluntarily save for anything? A) FICA takes too much out of their checks and B) They view FICA as the same as savings.

What an uninvested pay as you go system of retirement income for everyone gets you is incentive to take short term risks at the expense of long term investment. Day trading is taking on risk, but not in a productive way. Ideally, then, you want a system that provides a very minimal guarantee so as to incent long term risk taking with actual savings.

A mandatory savings program also has the attribute of providing an amount of retirement income, has the advantage of being actually invested, and ameliorates the tendency of people to let someone else pay for their retirement.

The tendency to 'Strengthen Social Security' as a replacement for investment will only get stronger as the AARP grows in political clout. They will be in a position to vote themselves whatever they want in the not too distant future, and all of it will be coming from a relatively small number of earned checks.

Posted by: Jason Ligon | Dec 21, 2004 5:12:17 PM

And why our GDP per capita leaves theirs in the dust?

It doesn't. Exclude top 5% and we are even. This means that for 95% of the population there is no difference in income, only the Americans have to work more and endure more risk.

Posted by: abb1 | Dec 21, 2004 5:18:28 PM

"Grover Norquist and Co. WANT the risk levels to be higher for all non-affluent Americans."

I'm sure that most locals believe this, but it is really a cartoonish take on the position. At base, the 'ownership society' business is about recognizing that the services I want and will pay for are not the same as the services I want and will force you to buy for me.

Politically, there is a very real push to force the liberal camp to cannibalize itself. When most Americans have a direct stake in the economic growth of the country, it will be difficult to convince them that taxing business is necessarily helpful - it is just taxing themselves. I know that Norquist has this thought in his head, because I heard him say as much in a speech about coalitions.

Posted by: Jason Ligon | Dec 21, 2004 5:19:16 PM

Good point. I quoted you and expanded your point a bit at The engine of the innovation: making it possible for people to take risks.

Posted by: Russ Abbott | Dec 21, 2004 5:23:23 PM

If you don't mind my asking, Jason, how old are you?

Posted by: Walt Pohl | Dec 21, 2004 5:24:04 PM

Walt:

31

Posted by: Jason Ligon | Dec 21, 2004 5:39:47 PM

Funny I thought Norquist was an Anarchist of the libertarian stripe who wants to destroy the state. No _seriously_

A society that allows less well off folks to take economic risks is what I'm after. That's what being an entrepreneur is. It's the social safety that makes me a "liberal".

I work in computer programming one of the most risky and potentially rewarding fields out there. Most of my fellow programmers that I've spoken with would prefer knowing that if they fall on their ass after starting a company they still can go to the dentist. And in case you are wondering I've worked as a consultant, in a small business, in NGO, and in government. So I've seen a pretty wide swath of this business....

Posted by: John Kealy | Dec 21, 2004 5:47:19 PM

abb1,

Two things: first, immigrants are happy to work for less than people born here, because by their standards, it's not "less."

Second, saying that if you exclude the top 5%, our GDP is the same as Europe's is really, really dumb. Yes, and if you exclude the top 70%, it's the same as China's! (I made up the #, but you get the idea.)

Posted by: Steve | Dec 21, 2004 5:48:39 PM

Just a guess, maybe showing my liberal paternalistic prejudices, but I would say the middle and lower middle classes in the real world take a foolish degree of risk. Lottery and other gambling behavior I believe is universal across cultures. Desperation, hopelessness, lack of security, false expectations lead to self-destructive financial behavior. Unless you happen to believe that vices and irresponsibility correlate class with character. The American working class are credit-card and house-poor.

Protecting them from themselves with a deep safety net and labor protection may create moral hazard, yet may actually be more efficient than dealing with them when they fail.

Posted by: bob mcmanus | Dec 21, 2004 5:54:09 PM

Jason, Walt and I would have guessed half that. You're aging gracefully.

In a society of increased risk, "labor discipline" would improve, and people dependent on paychecks would become more docile, more humble, and take fewer risks. Serious unemployment has a similiar effect. this is one of the intended effects.

Posted by: John Emerson | Dec 21, 2004 5:56:28 PM

When most Americans have a direct stake in the economic growth of the country, it will be difficult to convince them that taxing business is necessarily helpful - it is just taxing themselves.

most Americans already have a direct stake in the economic growth of the country: Americans are the country. their jobs are the basis of the economy.

Posted by: cleek | Dec 21, 2004 5:57:05 PM

"Most of my fellow programmers that I've spoken with would prefer knowing that if they fall on their ass after starting a company they still can go to the dentist."

As long as they realize that there is a price to be paid for that security, however it is arranged. The money that buys the security comes from opportunity, usually someone else's.

Posted by: Jason Ligon | Dec 21, 2004 5:58:06 PM

"Jason, Walt and I would have guessed half that. You're aging gracefully."

Nice. I hope to grow up into a wizened redisritubutionist some day, as all sophisticated people are.

Posted by: Jason Ligon | Dec 21, 2004 6:03:00 PM

As long as they realize that there is a price to be paid for that security, however it is arranged. The money that buys the security comes from opportunity, usually someone else's.Sure, as long as you realize there is a price to be paid for insecurity. In the 1880s (Germany) and 1930s (United States) it appeared that price might include violent revolution and hanging of the members of the capitalist class from lampposts, not to mention a bit of a negative effect on productivity.You do know this has been tried before, right? And that it didn't turn out well, gross measures of "wealth" creation notwithstanding? What is different this time? Computer technology allows detailed monitoring and control of those who might dare to dissent?Cranky

Posted by: Cranky Observer | Dec 21, 2004 6:04:27 PM

Steve, the point is that the average American is not better off than the average European. Furthermore, Europeans have advantages that don't show up in GDP. There's room for discussion about this, but your bragging is bone dumb.

Posted by: John Emerson | Dec 21, 2004 6:16:22 PM

"Steve, the point is that the average American is not better off than the average European."

Which invites the question, "Who is freeriding on whose risk taking?"

Given Matt's thesis, we should be able to see measurable innovative advantages in more socialized economies. Do we?

Posted by: Jason Ligon | Dec 21, 2004 6:33:57 PM

I'm not "bragging" about anything. I'm pointing out that the average American is better off, if we're using GDP, than the average European. abb1 thinks that isn't true, because the average of the bottom 95% of Americans is the same as the average European. As I said before, that's dumb. Why not exclude the top 5% of Europeans, and decide that Americans are way, way better off?

Posted by: Steve | Dec 21, 2004 6:36:40 PM

" the average American is better off, if we're using GDP",
Then Luxembourg must be paradise.

Posted by: ladder | Dec 21, 2004 6:44:14 PM

Jason Ligon said:
Nice. I hope to grow up into a wizened redisritubutionist some day, as all sophisticated people are.

Ah yes, redistributionism! The rallying cry of the woodstock generation.

(Nice to see you over here, Jason.)

Quoth Cranky Observer:
In the 1880s (Germany) and 1930s (United States) it appeared that price might include violent revolution and hanging of the members of the capitalist class from lampposts...

Our economy is free market. There is no "capitalist class," except in the minds of those who would enslave the general populace to serve their nanny state.

Remember, when it comes to nanny governments, all animals are equal, but some animals are more equal than others. It's the illusion of equality that counts, apparently.

Posted by: kmw | Dec 21, 2004 6:47:22 PM

The comments to this entry are closed.