Job creation requires risk-taking - Economics

USA Today (Society for the Advancement of Education), March, 2003 by John A. Challenger

RISK-TAKING is one of the essential ingredients in any nation's ability to expand and advance its economy. It was in the spirit of risk-taking that Christopher Columbus set off to discover the New World. It is what led our forefathers to break away from British rule. In modern times, risk-taking drove the rapid development and expansion of the Internet age.

However, a brutal series of events--including the dot.com collapse, the Sept. 11 terrorist attacks, the recession, and the decimation of American's stock portfolios--has resulted in a new-found aversion to risk-taking that will, at the very least, impede economic recovery. The worst-case scenario is that risk-avoidance will sap the U.S.'s competitive edge in the global marketplace.

Evidence of the new risk-aversion can be seen throughout the business world. Capital spending is also down across the country. A survey by the Business Roundtable of 150 chief executive officers from among the largest corporations in America revealed that 81% expect capital expenditures to be flat or decline in 2003.

Specifically, spending on new technology, which seemed to hit its zenith in 1999 as companies prepared in fear of a Y2K disaster, has never quite regained its former heights. One information technology consulting firm is projecting a three- to five-percent worldwide contraction in IT spending in 2003. Cisco Systems Inc. chief executive officer John Chambers told the audience at a recent conference that CEOs "are probably the most cautious I've seen in my business career."

Corporations are not alone in their aversion to risk. The fear is spreading to job-seeking Americans as well. Job-search statistics tracked by our firm show that, during and just after the last recession--which lasted from July, 1990, to March, 1991--an average of 15% of jobless managers and executives started their own businesses. Since March, 2001, the official beginning of the current recession, the percentage starting businesses has averaged just nine percent. In the fourth quarter of 2002, the start-up rate dropped to a paltry 5.2%.

Additionally, the percentage of job-seekers relocating--a good measure of risk-taking--is much lower now than in the last recession. In 2002, the relocation rate averaged 14% vs. 27% during the last recession-recovery period from the third quarter of 1990 through the end of 1992.

A human resource executive for a small health plan in Pomona, Calif., has seen firsthand the significant drop in out-of-town job candidates. Patricia Jacobson, director of human resources for Intervalley Health Plan, remarks that, as a small health plan, they have never received a lot of applicants from outside of their geographic region, but there were always some every year. Yet, in 2002 and so far in 2003, the health plan has not received one resume from an out-of-town job-seeker.

Further evidence of Americans' growing phobia about risk-taking can be seen in a survey of individuals managing their own pension plan accounts through Charles Schwab. It found that, in the third quarter of 2002, these investors directed 95% of their new assets into conservative mutual funds and fixed-income securities.

Several factors have contributed to the sudden aversion to risk. Just a few years ago, dot.coms were thriving; the New Economy was in vogue; and there was no end in sight to the prosperity that seemed to trickle down to all levels of the economy. Then, the bubble burst, setting off a chain reaction that would bring recession and stock market losses reaching into the billions. Combined with the shock of 9/11 and a series of corporate governance scandals, it is no wonder that business and the nation's workers decided to take a more-risk-free path.

The lingering impact of Sept. 11 is perhaps the biggest factor keeping risk-taking in check. Far more pervasive and enduring than anyone has admitted, it is the one factor that has made this recession-recovery period different from any in recent history.

This 9/11-induced fear of change is undoubtedly behind the dramatic decline in jobseeker relocation. Since the terrorist attacks, people have been more determined to stay close to their roots and their social safety nets. There is an overall fear of change that we have not seen before in this nation, which was basically founded on the backs of risk-takers. Even during the last recession, a war with Iraq did little to slow the pace of relocation. In fact, as the job situation continued to worsen after that recession ended, relocation showed an increase.

While job-seekers have exhibited more reluctance to take risks, such as relocating, employers have been just as unwilling to take risks and bear the cost of bringing someone in from another city or state. According to the corporate relocation survey issued in the summer of 2002 by Atlas Van Lines, 74% of companies said their relocation budgets decreased or stayed the same in 2001, while 80% indicated that relocation in 2002 would decrease or remain the same. Those most anticipatory of a decrease in relocation were small firms with fewer than 500 employees. Such businesses happen to be the biggest creators of jobs in the economy.