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Sep. 10 2009 - 12:57 pm | 17 views | 2 recommendations | 3 comments

Generation: Recession

Migrant Mother With Color

Image by Don Hankins via Flickr

Famously, people who lived through the Great Depression, people my grandparents’ age, were shaped so thoroughly by the experience that they never gave up attitudes of extreme thrift, aversion to financial risk, and even hoarding behavior.

Which naturally leads to the question: How will this “depression generation” be shaped by the current economic crisis?

Now, fine, it may only be a recession, not a depression. Hopefully it will only be a bad recession — say, a Great Recession. But this Great Recession is going to leave a mark. What will that mark look like?

We may think of our society as one with a short memory, matched only by its short attention span. But a pair of new papers looking at the long-term effects of recessions show that that’s not the case at all. These experiences stick with us. Partly because of memory, but partly because they implicitly shape our assumptions about the world in which we live (straining… not… to… mention… availability… bias… f#$k). In particular, those living through this crisis during early adulthood (roughly ages 18-25) are likely to see the greatest impact on their attitudes going forward.

As this paper (abstract / PDF) shows — perhaps unsurprisingly — those who have lived through terrible stock market returns “report lower willingness to take financial risk, are less likely to participate in the stock market, and, conditional on participating, invest a lower fraction of their liquid assets in stocks.” What’s more, these dispositions aren’t just affected by what happened last year: “While individuals put somewhat more weight on recent stock market returns and inflation than on more distant realizations, the impact fades only slowly with time. According to our estimates, even experiences several decades ago still have some impact on current risk-taking of older households.”

For instance, the paper looks at how those who experienced the Great Depression in young adulthood (“Depression Babies”) participated in the stock market versus those who came of age during the post-World War II boom. In midlife, only about 13% of Depression Babies participated in the stock market. By way of contrast, the post-WWII-boom babies, at midlife, had a stock-market-participation rate that was more than twice as high.

And, the paper shows, it doesn’t take a cataclysm on the order of the Great Depression to have this kind of effect:

For example, our data show that young households in the early 1980s, having experienced the dismal stock returns of the 1970s, had lower rates of stock market participation, lower allocation to stocks, and reported higher risk aversion than older households. For older households, the effect of the low 1970s stock market returns was moderated by the fact that their life-time experience included the high returns of the 1950s and 1960s. Following the boom years of the 1990s, this pattern flipped. Now young households had higher life-time average returns, and also higher rates of stock market participation, higher allocation to stocks, and lower reported risk aversion than older households.

And, now, the pattern will likely flip again, as young people who saw the bust of 2008-2009 move through the market.

But, of course, the effects here aren’t solely on stock-market participation. Another study (abstract / PDF) looks at how recessions affect our beliefs about the world, using data from the General Social Survey from 1972 to 2006. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, the study finds that:

[I]ndividuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions.

What’s more, it finds that these effects, like the stock-market effects, are long-lasting.

The good news for conservatives here (or the bad news for liberals, depending on how you want to look at it) is that a recession in one’s formative years does not seem to lead one to self-identify as more left-leaning — possibly because the desire for more government redistribution and the lack of faith in public institutions cancel each other out.

Still, on the whole, it seems like pretty cruddy news to me: a generation that feels it has less control over its destiny, that wants more from its government, and that’s less willing to take risks.

Welcome to Generation: Recession.

HT: Freakonomics Blog


3 Total Comments
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  1. collapse expand

    Great post, Ryan. I wonder if we’ll eventually see a rugged individualist revival in response to the rising public tendency to want more government support. Who’ll the next John Wayne (or, for that matter, Ronald Reagan) be?

  2. collapse expand

    This is kind of scary: “[I]ndividuals growing up during recessions tend to believe that success in life depends more on luck than on effort…”

    Does this mean that all the people who see reality television as a lucky-break way to make millions will only multiply?

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    About Me

    I'm a freelance writer and blogger based in Brooklyn, NY. My background is mostly in politics. I've worked on the editorial boards of the New York Sun and New York Post. In 2006, I wrote a book, "The Elephant in the Room: Evangelicals, Libertarians, and the Battle to Control the Republican Party" (Wiley). I've also done my share of freelancing, for places like the Atlantic Monthly, The New York Times, Reason, and RealClearPolitics.

    These days, I'm interested in humanity's ever-expanding understanding of its own irrationality. Hence, this blog.

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