Increased Armageddon Odds

[John Strohl]

The following thoughts were posted to The Economist blog labeled "Tail-Risks" (http://www.economist.com/blogs/freeexchange/2011/08/tail-risks) and is reposted here for discussion in our reading community. It presents both a reasonable sense of (part of) the problem, talks to the notion of "cognitive dissonance" without naming it, and ends with what I consider a profoundly "wrong-headed" sense of the solution. In the middle he's right on, and by the end he's completely backwards. -

KEVIN DRUM published a post last night titled, "Watching Armageddon from an armchair", in which he wrote:

Watching the world slide slowly back into recession without a fight, even though we know perfectly well how to prevent it, is just depressing beyond words. Our descendents will view the grasping politicians and cowardly bankers responsible for this about as uncomprehendingly as we now view the world leaders who cavalierly allowed World War I to unfold even though they could have stopped it at any time.

I had two thoughts when I read the post. One concerns the nature of panic in the journalistic world. The world is not ending, and while a renewed fall into recession across the developed world would be very costly and painful, especially for the unemployed, it probably wouldn't be an unmanageble situation. Growth would probably return fairly quickly, and the march of technological progress would probably go on, improving living standards for most people. Probably. The problem is that a renewed decline into recession increases the small but not insignificant odds of a true disaster—major debt or financial crisis, for instance, or major geopolitical instability. The kind of thing that isn't at all manageable. The situation is analogous to global warming. Given expected increases in global temperature, the world will suffer nasty consequences down the road, that may nonetheless prove manageable. The higher temperatures rise, however, the greater the odds of difficult to predict outcomes—like accelerating feedback loops—that threaten humanity itself.

As a writer, it's difficult to know how to approach these situations. Is it time to panic? No, it's not. Is it time to develop a serious sense of urgency about looming crises, the better to protect against expected pain and insure against the possibility of real disasters? Absolutely. The problem is in trying to convey urgency in an appropriately sober way.

The second thought is related; amid long crises, it's remarkably easy to lose one's bearings. One becomes inured to bad news and low expectations and finds its ever more difficult to assess the true severity of the situation. One becomes lost within debates over whether bad times are a departure from a norm to which we'll shortly return or a new norm. This affects businesses and households, just as it shapes the outlook of journalists and policymakers. One finds oneself hoping for something to act as an absolute anchor, to shock us back into an awareness of the true scope of the current mess, however bad or good.

It's not surprising to me that crises, once they drag on long enough, tend to drag on still longer. And the current situation reinforces the idea that strong, well-anchored automatic countercyclical stabilisers—fiscal and monetary—are the best hope for avoiding prolonged economic crises. We have to let the institutions work for us; we're too inconstant in our beliefs to save ourselves on our own.