There is often an instinct after a big economic shock to retreat from risk. Usually that means government adopting policies that accept risk on behalf of individuals. The Great Depression was followed by the New Deal; the Great Recession yielded the Affordable Care Act. It's no surprise that the pandemic brought Build Back Better, which aimed to expand the welfare state even further.
The future of the bill is uncertain, but no matter what replaces it, the move to siphon more risk from Americans’ lives at this point is a mistake. Some risk reduction has been valuable in the past, but today we are at a critical moment where more will cause harm. Rather than take risk out of the economy we need to add more in, especially for low-income people and the middle class.
That may sound crazy after two years of so much uncertainty, but lack of risk taking is what's wrong with the economy right now. The central insight from finance is that without risk there is no reward, and this is true outside financial markets too. There has been a notable decline in risk taking over the years: less entrepreneurship, fewer job switches, less moving and fewer people working. Economists estimate these trends are a big reason why wages aren’t growing as fast as they used to. It's notable that wage risk or volatility (how much wages go up or down year to year) has fallen for everyone but the top 5%—the same group whose income also grew much, much faster. Less risk taking means more stagnation, and less innovation and productivity improvement.
Coming out of the pandemic we have a unique opportunity to reverse this trend. Americans are finally taking more risks—quitting their jobs in record numbers and starting new businesses. Most of the new businesses are small or sole proprietorships. Some will fail, as most new businesses do, or become supplemental to a regular job. Regardless, the government should embrace this burst of risk-taking—and not by offering politically appropriate subsidies or arcane employment regulations designed to level the playing field for small businesses. The best way government can help is simply by getting out of the way.
There are many reasons why entrepreneurship has declined over the years. It's been harder in this economy to start a small business. A mom-and-pop store has a hard time competing with Amazon.com Inc. or Target Corp., which have more scale and can leverage technology to be more efficient. It's also become more expensive in terms of regulations. Each year brings more rules and oversight for businesses. In some states the cumulative effect can be prohibitively expensive. Consider the aspiring entrepreneur in San Francisco who tried to open an ice cream shop and spent $200,000 on permits and related fees before giving up without ever opening his doors.
The pandemic has made the situation worse, bringing more regulations and higher labor costs.
There is a ray of hope, though. Technology can also help startups by smoothing out many of the obstacles that come with working for yourself. It's easier to find clients on apps and to reach customers far away. After years of working from home, some people got a taste of flexibility and of setting their own schedules and may not want to go back to a rigid office structure. This probably helps explain the notable rise in business applications in the last two years.
These new entrepreneurs face many hurdles, some of which are the result of an economy in transition that is more globally competitive and favors bigness. But some hurdles are artificial and of our own creation. Unfortunately, we can expect more of those hurdles. Rather than encouraging people to embrace risk, policy has been creeping up to make it ever more difficult and expensive. The current administration wants to make it harder to hire gig workers, is favoring salaried unionized operations, and making it more expensive to hire people.