If the US economy feels like a casino, it may be because Americans are getting risks wrong

All of which raises the question: [Are Americans] in a casino economy, a risky free-for-all that is bound to crash and burn? The short, unsatisfying answer is ‘yes’ and ‘no.’ In many ways, the economy has never been safer, but people are avoiding healthy risks and taking bad ones.

The argument for a casino economy is—well, just look around.

First, there is artificial intelligence (AI), which like all new technologies creates boom-and-bust cycles that involve overinvestment in the wrong things, overvalued stocks, speculation and eventually a crash. AI may yet transform the US economy and enrich humanity, but along the way it will create new financial risks and more than a few bumps.

The US is also emerging from a period of very low interest rates, which tend to invite excess speculation. Low rates contributed to the opaque risks brewing in private credit, for example. And there is no denying that there are some odd things going on with assets with questionable value, such as crypto, meme stocks and gold, not to mention the widespread betting on sports and political events.

The argument against is more subtle. It is hard to square a casino economy with a population that shies away from risks that used to be routine. Can the same generation that was raised by helicopter parents really be turning the US economy into a casino?

It’s also unclear whether America is just in the hot part of a tech-driven investment cycle, with additional fuel from the overhang of very low interest rates, or whether this is actually an economy that is structurally riskier than before.

There are a lot of safeguards as of now. Households have more money, for example, and the American welfare state has grown over time to cover more people. A greater share of Americans than ever before has unemployment benefits, health insurance and retirement accounts.

And in many aspects of their lives, people in America are taking fewer risks. They are less likely to move, change jobs or even take a chance on a romantic relationship. These are good risks, ones that have a higher probability of working out and moving someone’s life forward. There are also bad risks, like mortgaging your home to bet on a football game. Part of the problem is too many Americans are taking fewer good risks and more bad ones.

The question is why.

One theory is that too many ‘good’ risks—such as getting married, starting a family or buying a house—have become too expensive. If people feel shut out of productive risk-taking, maybe they bet on sports or meme stocks instead.

But previous generations had even less money, and they still managed to achieve these life milestones. Besides, just because someone cannot afford to buy a house doesn’t mean they can’t take a healthy financial risk. How about investing in an index fund?

Another theory is that people in the US are encouraged to take fewer smart risks by social media. To be fair, betting on a sports game is more fun than index investing, and (usually) more dramatic too. Policy also contributes to this, as governments under-regulate sports gambling and overregulate housing, making it easy for Americans to bet but hard to move.

Finally, it’s important not to downplay the role of personal experience. This is a generation that took fewer risks as children and so may be less skilled in risk-taking than their parents. Financial literacy is not just about knowing what compound interest is—it is also understanding why some assets promise higher returns than others. Often it is because they are riskier.

The economy feels frenetic, and markets feel frothy because they are in that part of the cycle when people take more outlandish bets. This cyclical nature is nothing new; it is hard to argue these are uniquely risky times. But they are made worse by the presence of so many unskilled risk takers. And a crash will come—maybe not tomorrow, maybe not next year, but someday.

The question then will be how the US economy recovers. Because while crashes and corrections are a constant, human resiliency varies. With more widely available social insurance and greater wealth, more Americans are better able to handle setbacks than ever before.

But will America’s problem gamblers get the help they need? ©Bloomberg

The author is a Bloomberg Opinion columnist covering economics.