The risk-return trade-off is a critical decision every investor must face when deciding how and where to allocate capital. An investor seeking higher returns must be willing to assume higher levels of uncertainty or risk, including a potential loss of capital. If investors will not accept a higher level of uncertainty or risk, they must be willing to accept lower rates of return.
The same trade-off applies directly to economic growth. To achieve higher levels of growth, a nation must be willing to accept higher levels of economic uncertainty, including more frequent recessions. Nations that do not want to accept higher levels of uncertainty or risk taking must be willing to accept lower levels of growth.
Unfortunately, this simple concept is misunderstood by many in Washington and by those responsible for fiscal, monetary and regulatory policy. As the U.S. continues with its slowest economic growth cycle in history, much of the cause can be traced back to policy choices that discourage or simply prevent the nation (investors, consumers and producers) from engaging in economic risk-taking or accepting uncertainty. Basic economic risk taking includes starting a new business, seeking funding, launching a product or investing in research and development. All should be encouraged through valid economic policies. As the chart shows, with each decade of the post World War II era, not only has U.S. growth been decelerating but the level of risk-taking has been declining as well.