What You'll Miss About the Recession

The benefits of scarcity.

Jun 6, 2014 at 1:12PM

Unnamed

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. 

 

Looking for stock ideas?
Great. Andy Cross, The Motley Fool's chief investment officer, has selected his best stock idea for the year ahead. Find out which stock it is in our free report, "The Motley Fool's Top Stock for 2014." Just click here

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers