As small business executives continue to remain wary after being blindsided by the unprecedented Great Recession, their reasoning is as justified as it is rational, according to several industry experts.
“The Great Recession will have a permanent impact on economic behavior of those who were touched by it,” said economist Mike Knetter, who provided economic guidance to Presidents George H.W. Bush and Bill Clinton and now serves as president of the University of Wisconsin Foundation in Madison. “It changed people’s understanding of how volatile things can be in a market economy. With updated beliefs about volatility and the reduction in wealth that occurred, rational people had to adjust behavior and become more cautious than they had been previously. This, in turn, influences consumption, saving and investment decisions.”
Since such volatility, for the most part, had not dramatically touched the entrepreneurs of the day prior to the Great Recession, the damage to their psyche was particularly powerful.
“For those of us who were in business when the Great Recession hit, we found out that something bad could happen,” said Paul Hudec, associate professor in the Rader School of Business at Milwaukee School of Engineering. “It didn’t really hit anyone that something bad could ever happen.”
Rick Bauman, Ph.D., a business psychologist and a partner at Humber, Mundie & McClary, LLP in Milwaukee, draws a parallel between the imprint the Great Recession has left on business executives and the trauma endured by those who lived through the Great Depression.
“The leaders of today had many years of strength and relatively secure economics until all of a sudden the bottom fell out in 2008, and I don’t think that the current leadership has had experience dealing with the uncertainty that that caused, much as the Great Depression in the 1930s caused maybe a whole generation or more of very (fiscally) conservative people because they had to grow up during that time,” Bauman said.
Nor had the business leaders of today had a lot of experience living without a relative sense of control, said Bob Chernow, a futurist and vice president of RBC Wealth Management in Milwaukee.
“A lot of (business executives’) lives over which they had control before, they no longer had control over anymore, and that’s a good reason to have fear,” said Chernow, who insists the economic collapse beginning in 2008 was a depression, not a recession.
On top of the shockwave rippling through businesses throughout the economic collapse, the lingering uncertainty surrounding many points of public policy has only given business executives more reason to remain cautious, analysts say.
“I think there is also a second factor that pushes us in the same direction toward greater caution by both households and businesses, and that is the heightened uncertainty about the economic policies that will govern our market-based system,” Knetter said. “Financial regulation, monetary policy, fiscal policy and health care policy, to name a few, have undergone considerable change in recent years. There are great divisions about how each of these policy areas will evolve.”
As entrepreneurs continue recovering their businesses, they must grapple with questions that have unpredictable answers, Knetter said. Those questions include: Will the nation ever balance its budget again? What tax and spending changes will be made? Will the federal government completely unwind its quantitative easing policies at some point? If so, when? Will the new health care rules be fully implemented or modified?
“The degree of policy uncertainty is unusually high right now, partly reflecting the depth of the recession and financial crisis and partly reflecting our polarized politics,” Knetter said. “But it also makes economic households and firms cautious regarding long-term commitments.”
At the head of the uncertainty surrounding policy is a “lack of leadership” exemplified by a lack of agreement and a lack of bipartisan effort on the part of the government to take the country in a singular direction, according to Bauman.
The nation has a “cacophony of noise,” but “no clearly defined outcome that we are collectively seeking,” he said.
“We do not have consensus on what the outcome is,” Bauman said. “Everybody thinks they know what the outcome should be, but we have not had leaders sit down together and come up with a true consensus about what the result should be. And I think that that creates a lack of clarity. It creates volatility in relationships, and most of all it does not help to galvanize our attitudes where we’re willing to pull together.”
As the recession has continued to breed a great deal of caution among entrepreneurs, it has also reinforced the need for business leaders to think strategically as they move forward, according to Christine McMahon, a business strategist and a BizTimes Milwaukee columnist.
“Leaders today are much more rigorous in evaluating their balance sheet,” she said. “Their financial acumen about their business increased significantly as a result of the hardships that they experienced.”
While decisions prior to the Great Recession may have been made on a more casual basis, today much more justification and validation is needed before investments are made, McMahon said.
With this emerging focus on strategy has come new opportunity for creativity, according to experts.
“Although uncertainty can lead to a fear of the unknown, it can also lead to creativity, relationship strengthening and professional vulnerability,” said Dr. Christine Harness, a licensed psychologist and founder of Harness & Associates in Milwaukee. “There is nothing wrong with saying, ‘I don’t know’ during times of change. What is important for strategic teams is to ensure that they get all of the brain trust at the table to address how to best respond to fluid economies and markets.”
And what is important for business executives as they try to regain their trust in the fluid economy is their ability to anticipate the future, according to Bauman.
Bauman believes the human psychology at the core of current business caution is largely related to a lack of trust, which will take a long time to overcome.
“If we can build a capacity to anticipate, I think that that will take us in the right direction,” he said.