What You'll Miss About the Recession

The benefits of scarcity.

Jun 6, 2014 at 1:12PM

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HOBBES: Do you have an idea for your story yet?

CALVIN: You can't just turn on creativity like a faucet. You have to be in the right mood.

HOBBES: What mood would that be?

CALVIN: Last-minute panic.

When online gaming company Zynga went public a few years ago, it warned investors of a weird problem it was having. "Many of our employees may be able to receive significant proceeds from sales of our equity in the public markets after our initial public offering, which may reduce their motivation to continue to work for us," it wrote. Employees were so well paid they were getting lazy.

Mae West said "having too much of a good thing can be wonderful." But it can also be a curse. Scarcity has benefits that managers, investors, and everyday people habitually ignore.

I was talking to a colleague recently about a company that paid off an onerous debt load, freeing it from the chains of creditors. I thought this was a great thing, which seemed like the obvious response. He convinced me otherwise. "All companies should have a little debt" he said. "Just enough to keep them focused, less distracted by temptation, and think twice before blowing money on bad ideas." Too much freedom can be devastating, as trust-fund babies, lottery winners, and bored retiree often demonstrate. 

In their book Scarcity: Why Having Too Little Means So Much, Sendhil Mullainathan and Eldar Shafir write:

When scarcity captures the mind, we become more attentive and efficient. There are many situations in our lives where maintaining focus can be challenging. We procrastinate at work because we keep getting distracted. We buy overpriced items at the grocery store because our minds are elsewhere. A tight deadline or a shortage of cash focuses us on the task at hand. With our minds riveted, we are less prone to careless error. This makes perfect sense: scarcity captures us because it is important, worthy of our attention.

Nassim Taleb writes about the same idea in his book Antifragile: "The record shows that, for society, the richer we become, the harder it gets to live within our means. Abundance is harder for us to handle than scarcity."

That's pretty much America's story of the last three decades. In 2002, Alan Greenspan told Congress that "children, dogs, cats, and moose are getting credit cards." It was record abundance, where nearly anyone could buy nearly anything. It felt amazing, but nearly ruined the economy. It took 10% unemployment and a 50% market crash -- widespread scarcity -- to get people to cut up credit cards, sell the stuff the never used, and start saving money again. The prosperity of the early 2000s gave us some of the dumbest financial behavior ever seen, while the pain of the last five years brought out some of the smartest, most rational behavior witnessed in decades. 

It's hard to accept that people act smarter and more efficient when the economy is weak, because no one wants a weak economy. But it's often the case, especially among businesses. Necessity is the mother of invention, and there's evidence that entrepreneurship increases during recessions. According to the Kaufman Foundation, more than half of Fortune 500 companies were founded during a recession or bear market. The supermarket and laundromat were both created during the Great Depression as solutions to a weak economy. Penicillin -- credit with saving tens of millions of lives -- didn't go into widespread use in the medical field until World War II necessitated near-frantic scientific development. "The excess energy released from overreaction to setbacks is what innovates!" Taleb writes.

This has obvious limits. The working poor have been criticized as lazy and unwilling to take responsibility for their own success. But as Ezra Klein wrote a few years ago, these critics "don't seem to realize how difficult it is to focus on college when you're also working full time, how much planning it takes to reliably commute to work without a car, or the agonizing choices faced by families in which both parents work and a child falls ill. The working poor haven't abdicated responsibility for their lives. They're drowning in it." The poor devote so much effort to keeping their heads above water that they can't spare a second to think about how to get ahead, and scarcity of time creates a scarcity of opportunity.

But for most Americans, life is pretty good right now. And it's getting better, with scarcity on the decline. There are two big new headlines this morning: "Household Net Worth Hits Record High," and "U.S. Regains All Jobs Lost in Recession." That's great news. It's excellent news. I don't want to go back to where we were before. But there were benefits of the recessions we may miss.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

 

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