If the economy is going to recover, Americans need to start taking risks again.
"When people experience progress in their material living standards and they have some degree of optimism that it will continue, they're inclined to support public policies that reflect tolerance, opening of opportunity, and commitments to democracy," said Benjamin Friedman, a Harvard economist and author of The Moral Consequences of Growth.
A second moral imperative demands that America get back on the growth track. The United States remains the single largest source of demand. Until America emerges from its bunker, the global economy—facing its first year of contraction since World War II—is likely to remain moribund.
Saving cash and building up reserves is a necessary first step to recovery. But eventually the mountain of cash has to be put to work. Last week's sharp market rally was certainly a sign—however fleeting it may turn out to be—that investors are putting money to work again.
But there's much more work to be done. Ironically, post-bubble periods are frequently great times to start new ventures. The best time to start a dot-com wasn't in 1999 when the IPO market was raging; it was in 2002, when the price of everything associated with the business—office space, programming talent—had plummeted. When Allied Corp. in the late 1980s didn't want to pursue the development of consumer products based on global positioning satellite technology, Gary Burrell left, raised $4 million, and formed Garmin, which today employs about 7,000 people.
But investing during slack times requires a leap of faith. Thomas Watson, CEO of IBM, ramped up R&D spending every year from 1931-35. "His board of directors thought he was nuts," said Harvard Business School historian Nancy Koehn. But when the Social Security system was rolled out later in the decade, only IBM could handle the data-processing requirements. Both Southwest Airlines and Federal Express were founded in 1971 and took flight in a period when stagnant growth and soaring energy costs conspired against transportation companies.
"Recession-Plagued Nation Demands New Bubble to Invest in," ran a headline from the satirical magazine the Onion. But the antidote to a spell of mindless debt, spending, and investment isn't necessarily another binge of mindless debt, spending, and investment. Risk today has a bad name, in part because so much of the capital put at risk in the past several years was done so in vain. Much of the debt created didn't finance business or dreams (unless your dreams consisted of flat-screen televisions). Rather, it was simply debt layered on top of debt for the purpose of generating fees and trading profits.
Between 1996 and 2007, according to the Kauffman Foundation, about 0.3 percent of the adult population started a new business each month, or about 495,000 per month. There's no reason to think such entrepreneurial activity will decline in this recession, although there are some barriers. In recent years, many new businesses have been financed through retirement savings, second mortgages, and credit-card debt. None of those three sources of funding is particularly deep now.
Even so, layoffs can prove a powerful spur to entrepreneurship. Last October, Susan Durrett was laid off from her job at a San Francisco-based architecture firm whose business designing large resorts and condominium projects had dried up. "Starting my own business was actually my best alternative," she said. Reasoning that people might be forswearing major remodeling projects for smaller ones, she started her own firm, Susan Durrett Landscape Architecture, and now has four projects in the works. Durrett touts growth areas, such as green roofs, edible gardens, and sustainable design.
The new ethos of thrift, which is as much about efficiency and sustainability as it is about penny-pinching, may have significant commercial applications beyond green roofs. Venture capitalists are seeding startups in wind power and smart-grid technology. Small enterprises that install solar panels and conduct energy audits are expanding. They, and other businesses, will benefit from measures in the recently passed stimulus package to weatherize homes and make government buildings more energy efficient.
Of course, there's more the government can do. To name one example: An affordable national health care policy, which could allow people to quit their jobs and launch businesses without worrying about the crippling costs of premiums or medical costs, might be a better spur to risk-taking than targeted small-business loans.
The markets, and the economy as a whole, are continually buffeted by the twin forces of fear and greed. For the past year, fear has clearly had the upper hand. But over time, as fear subsides, our inborn instincts to improve our lot and desire for gains, and greed—Adam Smith would call it self-interest—will make a comeback. In the meantime, it wouldn't hurt for some of our most successful risk takers to step up.
The recently published Forbes list shows there are easily more than 300 American billionaires. And while their net worths have suffered, they still have the means to provide the risk capital that is now in short supply. That's what the nation's wealthiest family did during the Great Depression. In 1931, in the depths of the Depression, John D. Rockefeller Jr., who had spent his life giving away his father's fortune, embarked upon a massive, private stimulus program: the construction of Rockefeller Center. The project, the only major development in New York between 1931 and 1946, employed about 75,000 people, from stone-cutters in granite quarries to artists, architects, and welders. "It showed a great deal of confidence," says Daniel Okrent, author of the definitive book on Rockefeller Center, Great Fortune. Conceived as a sort of philanthropic, private-sector public works project, Rockefeller Center turned out to be a home run as an investment—and still supports thousands of private-sector jobs.
Newsweek's Daniel Stone, Nick Summers, and Jessica Ramirez contributed to this story. A version of this article appears in this week's Newsweek.
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at firstname.lastname@example.org and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.
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