RBA: Old farts are killing risk

Last night Deputy Governor of the RBA Phil Lowe delivered a thoughtful speech at the Sydney Institute titled Demographics, Productivity and Innovation. Click here to read it in full (I can’t load it for some reason!)

The gist of the speech is captured in this paragraph:

The point I want to emphasise here is that regardless of whether the techno-pessimists or the techno-optimists turn out to be correct, our attitudes to risk-taking, to innovation and to entrepreneurship have a significant influence on our future living standards.

At this point, I would like to return to one of the questions I asked you to think about at the beginning: how has our society’s attitude to risk and innovation evolved over time and what are the implications for productivity growth?

My own tentative answer is that there has been a subtle, but important, shift in the way we think about risk and innovation. In particular, our preferences appear to have shifted in such a way that we increasingly focus on risk mitigation and risk control. There are examples of this in a whole range of activities in our society – from the nature of the legislation that parliaments pass, to the increase in compliance activities in the nation’s boardrooms, to the amount of money we are prepared to spend to limit the probability of blackouts and even to our attitudes about the design of children’s playgrounds. In each of these areas, our society has been prepared to limit options or to spend more of our scarce resources to reduce risk.

I want to make clear that I am not saying that this is necessarily a bad thing. Wealthy societies like our own have considerable capability to address risks in a way that poorer societies cannot. After all, that is one of the benefits of economic progress. And it may also be the case that wealthy societies inherently have less tolerance for certain types of risk than do less wealthy societies. So what we are seeing may well be optimal from the perspective of our collective welfare, even if it does not maximise measured economic growth.

But, at least in my opinion, it is appropriate occasionally to ask whether we have got the balance right. Reducing risks is not always cost free – resources need to be devoted to the task and this means that these resources cannot be used for other tasks. And perhaps even more importantly, it might also be the case that a more risk-averse society is naturally less inclined to support and finance innovation, to implement new processes and to apply new technologies. If this is indeed the case, it has implications for future productivity growth.

Here, I want to circle back to the issue of demography, because some of the developments that I spoke about earlier have the potential to shape how our society thinks about risk, innovation and change in the future. You might recall the second question I asked: how might society’s attitude to risk and innovation change as a result of ageing of the population?

Again, there are no definitive answers. Older workers do have considerable accumulated experience that can boost their productivity. However, the available data both in Australia and the United States suggest that individuals in their 30s and 40s have a higher probability of becoming an entrepreneur than do older individuals. The take-up rate for new technologies is also higher for younger workers. In addition, younger people tend to be less risk averse than older people in their financial decisions. All else constant, this higher risk aversion of older citizens means that as the population ages, access to capital for more risky firms, especially start-ups with little business history, is likely to be more restricted and more expensive.

This is a very fine speech, made all the better by it being delivered to the aged rentiers at the Sydney Institute. One can imagine them all nodding sagely while entirely missing the irony.

I have only one point to add.

We are not lacking an innovative spirit and the problems of stagnant old farts can be overcome. What we are lacking are the tax, micro and macro economic settings to promote risk-taking in areas of productive innovation.

That’s it, no mystery, and the RBA should be making that point at every opportunity that it can. To understand that, read this.