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Loss Aversion (by Any Other Name) and the Decline of Dynamism
With the benefit of hindsight, it’s now pretty clear that capitalism in the advanced economies hit some kind of inflection point in the early 1970s. The point is made well enough on the website “WTF Happened in 1971?”, which features dozens of charts of various economic trends that all start going sideways sometime in the early 1970s. The graphics are of variable quality — I can pick bones with a number of them — but the signal is undeniable despite the noise. Something big happened, and it wasn’t good.
The fact that the early 70s marked a clear and unfortunate turning point didn’t really become clear — to me, anyway — until the aftermath of the 2008-09 Great Recession. In the United States, although productivity growth collapsed amidst the gas lines and stagflation of the 70s, surging growth in the workforce thanks to the Baby Boom and feminism, along with rising education levels that made the workforce more productive, served to keep overall growth rates steady. And then the advent of the internet triggered what appeared to be a productivity renaissance. From 1995-2004, productivity growth rivaled that of the postwar glory days. From the perspective of the American internet boom, the poor record of the prior two decades came to look like a temporary aberration caused by the macroeconomic disturbances of the 70s. Now the American innovation system was revving up again and all was well — or so I thought.
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But as the Great Recession gave way to a long, sluggish recovery, productivity growth dropped like a stone and never rebounded. Now the low productivity growth of the 70s and 80s no longer looked like a passing episode. Meanwhile, declining population growth, the plateauing of female labor force participation, and a marked slowdown in the rise of educational attainment all kicked in around the turn of the 21st century, ending the human capital boom that had helped to sustain strong growth. Throw in the Great Recession and its aftermath, and U.S. growth in “real” (i.e., inflation-adjusted) GDP per capita in the 21st century to date has sunk to around 1 percent a year — half the average annual growth rate of 2 percent that persisted over the whole course of the 20th century. Tyler Cowen called it in 2011: we are living in a “Great Stagnation” that began in the 1970s.
We can pin down the fact that some big shift occurred in the 70s because we have the quantitative economic data that document it. If we move beyond the purely economic realm to look at technological and scientific progress, the problems of measurement get much harder, but we can make a plausible quantitative case for a slowdown there as well — and a slam-dunk case that innovative activity is experiencing sharply diminishing returns.
If you’re willing to venture out beyond the quantifiable, you can catch a glimpse of a much bigger picture — of a “great stagnation” that is not just economic, not just technical, but sweeping and civilizational. I was born in 1962, so I was just a little kid before the Fall — but I do have a sense of what things were like, because I remember Apollo. The space program was the great enthusiasm of my boyhood (see the letter below); when it sputtered and shrank, my little broken heart could feel the future shrinking with it.
The older I get, the more I look back on the 1960s with astonishment at the swaggering boldness and ambition of the time. America was rich, we were in possession of immense powers, and the constraints that had bound so tightly in the past now looked rotten and frayed and ready to snap. The possibilities seemed endless, and intrepid explorers were pursuing them in every direction: outer space, under the sea, in fashion and music and cinema, and in an uproarious counterculture dreaming of new utopias. How perfect that the first moon landing and Woodstock occurred less than a month apart in the summer of 1969. And that, by the end of that year, the soaring dreams of both Apollo and Dionysus had soured: the dramatic drop in the launch day crowds and TV ratings for Apollo 12 foreshadowed the upcoming downsizing of the space program, while the counterculture met its nemesis at Altamont and in the Manson family.
In Fear and Loathing in Las Vegas, Hunter S. Thompson wrote this elegy for the era of Peace and Love, but it could apply just as well to the Promethean and technocratic dreams of the 60s:
It seems like a lifetime, or at least a Main Era — the kind of peak that never comes again… There was madness in any direction, at any hour. You could strike sparks anywhere. There was a fantastic universal sense that whatever we were doing was right, that we were winning....
And that, I think, was the handle — that sense of inevitable victory over the forces of Old and Evil…. We had all the momentum; we were riding the crest of a high and beautiful wave....
So now, less than five years later, you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high water mark — that place where the wave finally broke, and rolled back.
In the 60s, America was buzzing with plans for transformation and revolution. In the 70s, those plans were shelved and people’s ambitions dwindled down to fit within their own skins. In just a few years, the watchword of American civilization had gone from “change the world” to “find yourself.”
How did this happen? What drove this massive retreat? In my last essay, I looked at one piece of the puzzle: the natural tendency of progress to get harder as the low-hanging fruit of possible gains is exhausted. This factor, I believe, has played a sizeable role in explaining the economic slowdown experienced by the United States and other rich democracies. But to explain the broader civilizational slowdown, more, much more, is needed.
Here I offer another piece of the puzzle — again, not the whole answer but an important factor all the same. It’s another natural tendency, not of economic development this time but rather individual psychology. To employ the language of social science, we can call it loss aversion — or status-quo bias, or psychological inertia, or the endowment effect, or just good old-fashioned risk aversion. To put it in the language of common sense, people get attached to their stuff and don’t like losing it. When a society grows rich, that means large numbers of people now have a lot to lose. And because losing what you have is painful, people will naturally take pains to hang on to what they’ve got — even if that sometimes means passing up on the chance to get more. As a result, we can expect the advent of mass affluence to be accompanied by a heightened sensitivity to losses and a shift toward greater conservatism in the face of change and uncertainty.
Loss aversion refers to the proposition that the pain of loss is greater than the pleasure of an equivalent gain. We all know from introspection that we too often dwell on our losses and failures instead of feeling pride in what we’ve accomplished and gratitude for what we’ve got. If you’re a sports fan, you know that star athletes routinely say the agony of defeat stays with them far more than the thrill of victory.
In behavioral economics, loss aversion has been presented as a kind of universal principle, and foundational to the broader behavioral-economics vision of human decision-making as beset by various biases and forms of irrationality. It is a key idea in “prospect theory,” the theory that financial decision-making is driven by asymmetrical attitudes toward gain and loss and for which (among other work) Daniel Kahneman was awarded the 2002 Nobel Prize in economics. To give you an idea of how influential the ideas of loss aversion and prospect theory are, the original 1979 paper on prospect theory by Kahneman and Amos Tversky is the most cited paper in all of economics and the third most cited paper in psychology.
As has happened with many major findings in psychology, the existence of loss aversion is now under some question. But as I’ll explain, the scholarly debate has no real relevance to my use of the concept here. There is no doubt that people often forgo big gains to avoid a smaller loss — and that’s what matters to me. What is at issue in the debate is why. Is it because of a general psychological asymmetry in which the negative experience of a loss is more intense than the positive experience of an equivalent gain? Or is it because of some narrower, more contextual psychological phenomenon?
That is, perhaps people sometimes pass up big gains to avoid smaller losses because of status-quo bias, or a preference generally for inaction over action when a loss is possible. Or maybe it’s because of the broader phenomenon of psychological inertia, in which people tend to want to maintain the status quo regardless of the possible upside or downside. Or maybe it’s because of the endowment effect, in which people tend to value something that they own more highly than they would if they didn’t own it already. Or maybe it’s the more familiar phenomenon of risk aversion, in which people tend to favor certainty over uncertainty and therefore prefer small risk-reward ratios.
The subtleties of these distinctions are doubtless interesting and worth teasing out, but they make no difference at all for present purposes. What matters here is that there are a variety of psychological tendencies that lead people to want to hang on to what they have, even if it means missing out on something better. My contention is that we can see these tendencies playing out in contemporary society at mass scale, and that they help to explain why we have adopted more conservative attitudes towards change as our society has grown rich.
Loss aversion, by any other name, helps to explain the rise of NIMBYism and the increasingly restrictive local land-use regulation that is now doing so much harm — slowing growth, exacerbating wealth and income inequality, locking in residential segregation by class and race, and accelerating climate change by promoting sprawl. Sam Bowman and Ben Southwood, founding editors of the fine new publication “Works in Progress,” have cowritten (along with John Myers, a co-founder of London YIMBY and YIMBY Alliance) a superb essay titled “The Housing Theory of Everything” that makes a convincing case that artificial restrictions on housing supply are at the root of a great number of the most serious problems afflicting rich democracies today. And at the root of those artificial restrictions is the desire of homeowners to protect what is typically their biggest economic asset from the risks of change — even if the result is that those homeowners end up living in a poorer, more dangerous, more inequitable world.
It's no coincidence that, in the United States, the pernicious effects of land-use regulation on housing supply started making themselves felt in the 1970s. Residential zoning had been endemic in the country for decades by then, but it took some time for metro areas — starting with big coastal cities with hard-and-fast geographic limits on sprawl — to fill in with enough residential construction that the collective veto power of incumbent homeowners sufficed to put the squeeze on new supply. Since then the maladies caused by this vetocracy have greatly intensified in the cities where they began and then spread to metro areas across the country.
Loss aversion, by any other name, has also played a role in the long-term decline in geographic mobility. The percentage of people in a given year who move either to another county or another state (i.e., to another labor market) is down around 50 percent since 1980. To some extent this may reflect less reason to move than in the past, due to a declining rate of overall job turnover, declining geographic variation in job opportunities, and better access to information about job opportunities around the country and thus less need to move “on spec” in search of a job. But affirmative obstacles to moving have arisen as well — and having more to lose is a consistent reason for the creation of those barriers. The rise of the NIMBY vetocracy, for one thing, blocks people from moving to the highest-income, most productive cities because the restrictions on residential construction make housing too expensive there. Meanwhile, differences between states in access to public benefits, as well as state-based occupational licensing that does not transfer to other jurisdictions, can deter interstate mobility as well by giving potential movers more to lose from leaving their home state.
Beyond policy barriers, the deepening of personal roots in the fastest-growing parts of the country has reduced the willingness to pull up stakes. Specifically, economists Patrick Coate and Kyle Mangum find that the maturation of communities in the Sunbelt has produced more rooted populations that are less likely to move:
Migration propensity depends strongly on preference for one’s place of origin, and the average attachment has increased because regional population growth has converged. Over the 20th century, the U.S. population expanded across the continent, and Sunbelt locations of the West and South grew explosively. New cities, populated by transplants, had high rates of gross out-migration because of weak attachments–hence we deem these “fast locations.” In more recent decades, the population growth rates across regions have converged, and fast locations are increasingly populated by natives with higher degrees of home attachment instead of weakly attached transplants. Consequently, migration out of these places has declined. Because fast locations were the source of the majority of migrants, their decline has driven down the national average.
The fall-off in geographic mobility means a less productive, slower-growing economy. Growth has always been geographically concentrated in particular places at particular times; population growth in high-productivity cities is thus an important component of maximizing the wealth-creating powers of new firms and new industries. In the past, local economic booms were associated with explosive population growth: between 1870 and 1950, New York City’s population grew more than 700 percent, Chicago’s shot up over 1,100 percent, and Detroit’s mushroomed by more than 2,200 percent. By comparison, look at the recent experience of San Jose in the heart of Silicon Valley: between 1995 and 2000, at the height of the internet boom, 100,000 more Americans moved out of the metro area than moved in. Throughout all of history, the dominant pattern of migration is away from poverty and toward opportunity. Today, though, America’s fastest-growing cities lag far behind the leading cities in wage levels and income growth. In Ryan Avent’s turn of phrase, Americans are “moving to stagnation.”
Loss aversion, by any other name, is also making itself felt in the greatly escalated priority assigned to health and physical safety. Prior to the life expectancy revolution of the 20th century, the perceived opportunity cost of unhealthy habits and dangerous conduct was relatively low. When you could drop dead in an instant because of infectious disease or a workplace accident, paying too much attention to the risks you could control seemed pointless. Resigned fatalism about the looming possibilities of disease and harm was understandable and maybe even advantageous. But as death prior to old age became, not just a stroke of bad luck, but something extraordinary and tragic, attention to avoiding such a terrible outcome naturally intensified.
I’ve seen attitudes transform over my lifetime. When my kids were little, I would regale them with stories of how Dad grew up “before we invented safety.” I remember when celebrities smoked on television talk shows and football players fired up during halftime. Me, I pretended with candy cigarettes coated in powdered sugar so you could blow smoke. When a lot of people were driving together somewhere, it was common to put all the kids together in the back of somebody’s pickup truck. My mom’s right arm would fire out locked at the elbow to keep me from whacking my head on the glove compartment during a sudden stop; that was our version of seatbelts. And I’ve logged plenty of hours on old-school monkey bars and jungle gyms, delivered and received my share of face smashes in dodgeball, and played a game I can’t even say the name of anymore that involved designating one boy to be chased and gang-tackled by a mob of other boys. It felt like there was always at least one person in my class collecting autographs on their cast.
I’m certainly not pining for the old days. Our air and water are much cleaner, our workplaces are much safer, the percentage of Americans who smoke has fallen from over 40 percent in 1970 to under 13 percent today, and traffic fatalities per million vehicle miles today are less than 30 percent of what they were in 1970. Requiring enterprises to internalize costs they once imposed on workers and the public is an important step toward “living wisely and agreeably and well.”
But it’s obvious that our greater caution has costs in terms of reduced freedom of action. Internalizing costs is, well, costly, and when something becomes more costly you get less of it. In many cases the price is worth paying, but it’s still a price.
The problem with our new health and safety consciousness is that, once you start worrying about such things, there’s no obvious stopping point. And since risk cannot be eliminated from life altogether, the quest to eliminate salient risks invariably ends up increasing other risks that are less apparent. Nowhere is this conundrum more dramatic today than in the obstacles that current environmental regulations pose to the transition to clean energy: we have regulated one major clean power source, nuclear, out of existence, and environmental review and permitting requirements are vastly complicating the build-out of solar and wind farms and new transmission capacity.
In a fascinating paper titled “Life and Growth,” the economist Charles Jones models how the rising value assigned to a human life can dramatically alter the prospects for economic growth. “The value of life may rise faster than consumption, leading society to value safety over consumption growth. As a result, the optimal rate of consumption growth may be substantially lower than what is feasible, in some cases falling all the way to zero.” This seems like a reasonably accurate description of the slope we’re currently slipping down.
Looking beyond the economy to our personal lives, a runaway safetyism is now threatening the healthy psychological development of our children. Helicopter parenting, snowplow parenting — these are drearily familiar concepts if you’ve had kids in school over the past 20 years. Middle- and upper-class kids’ lives are now heavily structured and intensely scheduled; the spontaneous play that comes naturally to children and teaches resourcefulness and resilience and fairness and how to resolve differences is all but gone. I don’t think we have a good empirical handle on the effects of this overprotective parenting on children’s later wellbeing, but I can’t imagine that they’re positive. We do know that mental health problems among young people are way up. At any rate, it’s also hard to imagine that this is a parenting style well suited to producing a dynamic society of bold risk-takers and gritty, perseverant strivers.
Finally, and to describe more generally a phenomenon some of whose specific manifestations I’ve already alluded to, loss aversion by any other name is a factor in the massive build-up of Olsonian “distributional coalitions” — narrow economic interest groups of every sort – in the political economy of recent decades. I’ve already provided examples: NIMBYism that blocks new construction, occupational licensing that hinders geographic mobility, and the vetocracy that stands in the way of clean energy. As Mancur Olson argued, the longer peace and prosperity persist, the more groups with a stake in the status quo will arise and figure out how to organize themselves; in other words, getting richer means more people with more to lose and thus with a motive to band together and defend what they’ve got. I would add that a massive plunge in communications costs has greatly facilitated this process. Although these groups frequently have positive, offensive agendas — and they’re often very bad! — far and away their top priority is maintaining their current advantages and fending off any change that could threaten them. All this micro-level defensiveness scales up at the macro level to daunting political obstacles to any major departure from the status quo — most especially when such departures involve changes to the physical world.
I’ll close with some observations about Tyler Cowen’s 2017 book The Complacent Class, whose argument fits in with — and considerably broadens — what I’ve said here. I read the book when it came out, and I’ll confess it didn’t really register with me. I enjoyed it and found it interesting, but it didn’t do anything to reorient my thinking. I’m guessing that at the time I was so focused on The Captured Economy, which came out later the same year, that I was reading and thinking about everything through that prism. But I went back and looked at the book again when writing this, and wow this time it really hit home.
I see now how Tyler, after writing The Great Stagnation a few years before about the faltering economy, was led to see a broader social stagnation:
Americans are in fact working much harder than before to postpone change, or to avoid it altogether…. In an age where it is easier than ever before to dig in, the psychological resistance to change has become progressively stronger. On top of that, information technology, for all the disruption that it has wrought, allows us to organize more effectively to confront things that are new or different, in a manageable and comfortable way, and sometimes to keep them at bay altogether.
Given the growing success of the forces for stasis, I see complacency – a general sense of satisfaction with the status quo – as an increasingly prominent phenomenon in American life.
Tyler casts the net more widely than I have done here, mentioning most of the trends I’ve talked about but also throwing in declining market competition, assortative mating, trigger warnings, residential segregation, political polarization, the decline of driving, and how Amazon, home food delivery, and online streaming services have led millions of us to self-imposed house arrest.
Accordingly, the “complacency” he describes is a broader concept that includes loss aversion but also folds in the desires for comfort, control, and continuity. He’s describing the overall effect of declining civilizational dynamism in his own earlier version of Ross Douthat’s The Decadent Society, whereas here I’m trying to isolate one cause of that general condition. As to causes, Tyler has little to say beyond a quick point of the finger toward mass affluence: “The forces behind the rise of the complacent class are quite general. For better or worse, the truth is that peace and high incomes tend to drain the restlessness out of people.”
So for a fuller picture of what’s going wrong, I heartily recommend The Complacent Class as an expansive sequel to The Great Stagnation. But if you want to get to the bottom of why things are going wrong, keep reading here. In upcoming essays I’ll continue to explore and identify the underlying causes that have brought us to this Age of Stasis. In the next essay, I’ll address a development that can be seen as yet another manifestation of loss aversion, but one that has developed its own distinctive ideology: the backlash against modernity’s Promethean project of increased mastery over nature.
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