Venture Capitalists, Traders, and Policy Makers

7/9/20

Policy makers could learn a thing or two from venture capitalists and traders.

By way of background, venture capitalists are investors who typically invest in early-stage companies. They do so with the full appreciation that many of the firms that they invest in won’t be successful, and those investments will be lost. The hope is, however, that the ones that do succeed will generate sufficiently generous gains to justify taking the losses for those that fail.

Traders operate with a somewhat similar approach. Active traders expect to lose on many of their trades, too; but they strive to limit their losses on the losing trades relative to the amount they make on winning trades. You’ll do fine even if half of your trades are losers as long as the average gain on winners exceeds the average loss on losers.

The lesson here is that not every investment necessarily has to be a winner.

I bring this orientation to the table in connection with prospective fiscal policy responses to the Covid 19 crisis. It’s clear that the economy has suffered a devastating setback with this virus; and given the resurgence of cases the prospects of the economy roaring back anytime soon should be seen to be a pipedream.

At this point, with double digit unemployment rates and widespread insecurity relating to food, shelter, and healthcare, pressures are mounting for congress to offer additional fiscal support for the those at the bottom of the economic ladder. The point of the above preface is that this aid should be thought of as an investment — not as a handout.

I come to this perspective, in part, because of an interaction I just had with a doctor I recently met. He had emigrated from Russia when he was 15, coming to the US with his parents and sister. He’s been a practicing physician in New York for 16 years. He loves America. He feels like he’s the embodiment of the American dream and that it’s unlikely that he would have achieved he same level of success in any other country.

His family arrived here with nothing. They were helped by by private social service agencies, and they were supported on welfare. Paraphrasing his words, America made an investment in his family, and it paid off. His parents became computer programmers, he’s a doctor, and his sister is a lawyer. Collectively, all of them have paid much more in taxes than they ever cost the government during their early time in this country.

I consider my doctor friend’s experience as I think about those with nothing to fall back on who are facing the economic consequences of Covid 19. Perhaps with the exception of those who received the unemployment insurance supplement, many if not most of the people most affected by Covid 19 have received a pittance. With the doc’s history in mind, that miserly approach seems incredibly shortsighted. We should think of investing in these people, realizing that despite that investment, many may still be trapped in the yoke of poverty, anyway; but with a more generous amount of help, the vast majority would be better able to navigate under the current distressed situation and ultimately pay back this support in spades, through higher taxes, just the way my doctor friend and his family has.

America should be a land of opportunity, but we gotta give people a fighting chance; and America will be the better for it if we do.

Kawaller holds a Ph.D. in economics from Purdue University.