How to Live With Economic Doomsaying | Philipp Carlsson-Szlezak | TED

Summary

The speaker critiques the persistent pessimism in economic forecasting, highlighting historical instances where predicted crises, such as the 2020 pandemic's impact, did not materialize as feared. They argue that the reliance on flawed macroeconomic models and the media's penchant for sensationalism contribute to this culture of 'doomsaying.' Instead, the speaker advocates for rational optimism, urging individuals to embrace uncertainty and assess risks more broadly, rather than relying on deterministic models or sensationalist headlines.

Takeaways

• 🌐 Economic discourse often focuses on doom and gloom, creating a narrative of impending disaster.
• 🔮 Forecasting models used by economists have limitations and are not always accurate in predicting economic outcomes.
• 📰 The media tends to sensationalize economic risks, contributing to a culture of pessimism and fear.
• 💡 Despite predictions of economic downturns, many times the economy has shown resilience and recovered swiftly.
• 🤔 There is a need for self-reflection among economists, the media, and the public to understand the reasons behind the prevalence of doomsaying.
• 🔄 Economists should avoid relying on a single model and instead embrace the complexity and uncertainty of economic systems.
• 🌟 Rational optimism involves acknowledging potential crises while also recognizing the capacity for recovery and growth.
• 🔍 A broader analytical perspective allows for a more balanced view of risks and the potential for both positive and negative outcomes.
• 📈 Economic models should account for a wide range of variables and historical data to improve their predictive capabilities.
• 🚫 The costs of acting on false economic alarms can be significant, impacting businesses, society, and individuals.
• 💭 Consumers of economic news should be critical and discerning, not blindly following predictions without questioning their validity.

Q & A

What is the common theme in public discourse about the global economy?

The common theme in public discourse is the portrayal of the global economy as constantly on the brink of disaster, with frequent predictions of economic collapse or severe downturns.

How did the global economy actually perform after the 2020 pandemic hit?

Contrary to predictions of a deep depression, the global economy experienced a swift and strong recovery after the 2020 pandemic hit.

What was the initial prediction about inflation in 2021?

In 2021, doomsayers predicted perpetual inflation and a return to the high-inflation era similar to the 1970s, but this did not materialize as inflation fell after an initial spike.

What misconceptions about the economy were prevalent in 2022?

In 2022, there was a widespread belief in the inevitability of a recession, but this turned out to be unfounded as unemployment rates remained low on both sides of the Atlantic.

Why does the speaker suggest that doomsaying is prevalent in economics?

The speaker suggests that doomsaying is prevalent due to a combination of factors, including the inability of economists to accurately forecast using flawed models, the media's inclination towards sensationalism, and a natural human tendency to worry and focus on potential negative outcomes.

What are the real costs associated with false economic alarms?

The real costs of false economic alarms include leadership costs from incorrect decision-making and hard-dollar costs for firms and society, such as lost production, sales, revenue, and profits, as well as increased prices and inflation.

How does the speaker propose we should approach macroeconomic risks?

The speaker proposes embracing uncertainty and letting go of the master-model mentality. Instead of chasing elusive certainty in forecasts, we should accept the diverse drivers and messy reality of economics, and focus on understanding the distribution of risks and signposts along the way.

What is the difference between natural sciences and economics in terms of predictability?

Natural sciences have stationary laws that allow for more definitive conclusions, while economics lacks such laws and is characterized by a limited number of historical precedents, making it difficult to create accurate models and predictions.

Why did macro models fail to predict the recovery from the 2020 pandemic?

Macro models failed to predict the recovery because they anchored on the unemployment rate, which had never reached the levels seen during the pandemic. The models extrapolated beyond their empirical base, leading to inaccurate forecasts.

What is the speaker's stance on the use of models in economics?

The speaker criticizes the reliance on models in economics, arguing that no single model can provide a definitive macro answer or forecast. Instead, economists should embrace the complexity and uncertainty inherent in the field.

How does the speaker define 'rational optimism'?

Rational optimism is defined as the balanced understanding that while future crises are a rational concern, it is not rational to assume them. It involves embracing uncertainty, understanding the full distribution of risks, and not outsourcing judgment to alarmist headlines.

What advice does the speaker give for consumers of economic news?

The speaker advises consumers of economic news to be critical and not to take alarmist predictions at face value. Instead, they should dare to be rational optimists, questioning the drivers of potential crises and the pathways to and from risk.

Outlines

00:00

🌪️ Economic Doom and Gloom: The False Alarms

This paragraph discusses the common narrative of economic doom and gloom that is often perpetuated in public discourse. It highlights how the global economy is frequently portrayed as being on the brink of disaster, with examples such as the 2020 pandemic, where predictions of a deep depression were made but did not materialize. The speaker points out that despite these repeated false alarms, the economy has shown resilience with strong recoveries and low unemployment rates. The paragraph questions why there is such a focus on negative economic predictions and suggests that it may be due to the limitations of economic models and the sensationalism of the press. It emphasizes the real costs of these false alarms for businesses and society and calls for a more balanced approach to understanding macroeconomic risks.

05:02

💡 Embracing Rational Optimism in the Face of Economic Uncertainty

The second paragraph shifts the focus from the negative predictions to the concept of rational optimism. It argues that instead of relying on economic models that promise certainty, it is more productive to embrace the inherent uncertainty in economics. The speaker points out that the economy is complex and diverse, and that historical data may not always be a reliable predictor of future events. The paragraph also discusses the role of natural sciences in comparison, noting that even they faced challenges in predicting the COVID-19 pandemic's impact. The speaker advocates for an open and eclectic mindset, one that acknowledges the possibility of future crises but does not assume them. It encourages individuals to think critically, assess risks broadly, and not to outsource their judgment to alarmist headlines. The paragraph concludes with a call to action to be a rational optimist, one who is aware of potential risks but also recognizes the capacity for positive outcomes.

Keywords

💡Doom and Gloom

The phrase 'doom and gloom' refers to a pervasive sense of negativity and pessimism, often associated with predictions of disastrous events or outcomes. In the context of the video, it describes the common public discourse about the global economy, where there is a tendency to focus on potential economic disasters and crises. The speaker criticizes this narrative for creating unnecessary fear and anxiety, and instead advocates for a more balanced and rational approach to understanding economic risks and opportunities.

💡False Alarms

A 'false alarm' is a warning or prediction that turns out to be incorrect or unfounded. In the video, the term is used to describe the inaccurate economic forecasts that lead to unnecessary concern and action. The speaker argues that such false alarms can have real-world consequences, as they can influence decision-making and lead to missed opportunities or unnecessary costs.

💡Rational Optimism

Rational optimism is a balanced and informed approach to viewing the future, recognizing both potential risks and opportunities without succumbing to undue pessimism or unrealistic expectations. It involves acknowledging the possibility of adverse events while also considering the likelihood of positive outcomes. The speaker promotes rational optimism as a healthier and more productive mindset for individuals and organizations navigating economic uncertainty.

💡Macroeconomic Risk

Macroeconomic risk refers to the potential for large-scale economic events or conditions that can significantly impact the overall performance of economies, markets, and businesses. This includes risks associated with factors such as inflation, recession, and market volatility. The speaker discusses how professionals often need to navigate these risks, and how the focus on doomsaying can distort perceptions and lead to poor decision-making.

💡Economic Models

Economic models are theoretical frameworks used to analyze and predict economic behavior and outcomes. They often rely on assumptions and empirical data to simulate how various factors interact within an economy. In the video, the speaker critiques the reliance on these models for forecasting, arguing that they can be overly simplistic and fail to capture the complexity and uniqueness of economic events.

💡Uncertainty

Uncertainty refers to a state of incomplete knowledge or unpredictability about events or outcomes. In the context of the video, embracing uncertainty means accepting that economic forecasting is inherently imperfect and that it is more productive to focus on a range of possible outcomes rather than seeking a single, definitive prediction.

💡Media Influence

Media influence refers to the impact that news outlets, journalists, and other media professionals have on public opinion and perception. The video discusses how financial and economic journalism can contribute to a culture of doomsaying by emphasizing negative narratives and sensational predictions, which can shape public discourse and influence economic behavior.

💡False Narratives

False narratives are stories or explanations that are not supported by facts or evidence. In the context of the video, the term is used to describe the inaccurate and misleading economic predictions that are often presented as certainties, leading to misguided actions and decisions.

💡Risk Distribution

Risk distribution refers to the range of possible outcomes and their associated probabilities in a given situation or event. It is a concept used to describe the potential variability of results when dealing with uncertain situations, such as economic forecasting. The video emphasizes the importance of considering the entire risk distribution rather than focusing on the most extreme or negative possibilities.

💡Economic Recovery

Economic recovery refers to the period of growth and improvement following a recession or economic downturn. It is characterized by increased economic activity, job creation, and a return to a more stable and healthy economic state. The video discusses the unexpected economic recovery in 2021, which defied predictions of a deep and prolonged depression following the 2020 pandemic.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to limit inflation and avoid deflation to keep the economy running smoothly. In the video, the speaker addresses concerns about inflation, particularly in the context of the economic recovery following the 2020 pandemic, and counters the doomsayers' predictions of perpetual high inflation with the eventual decline in inflation rates.

Highlights

The global economy is often portrayed as being on the brink of disaster, but this is not always the case.

In 2020, despite predictions of a deep depression following the pandemic, a swift and strong recovery occurred instead.

Inflation fears in 2021 did not lead to a return to the high inflation of the 1970s, but instead fell after an initial spike.

The fear of a cascade of emerging market defaults in 2022 did not materialize, with these currencies performing better than those of rich economies.

In 2023, despite widespread belief in an inevitable recession, unemployment rates remained low on both sides of the Atlantic.

The tendency towards doom and gloom in economic discourse may stem from a lack of accurate forecasting models and a media bias towards negative narratives.

Economists often rely on sophisticated but flawed models that fail to predict economic outcomes accurately.

Financial and economic journalists may contribute to doomsaying due to a lack of other sensational topics to cover.

There is a human tendency to worry and obsess, which may contribute to the popularity of doomsaying narratives.

The costs of false alarms in economic predictions can be significant, impacting firms, society, and individuals.

The speaker's career has been focused on helping executives and investors navigate macroeconomic risks and the challenges posed by changing economic narratives.

The worry about economic volatility and the costs of false alarms can be mitigated by embracing uncertainty and avoiding reliance on a single economic model.

Economists should learn from the natural sciences' experience with the pandemic, where predictions also fell short.

Rational optimism involves acknowledging the possibility of future crises but not assuming them, and understanding the full distribution of risks.

The public discourse's negative skew and the entertainment value of news contribute to the perpetuation of pessimistic economic narratives.

Doomsayers are not held accountable for their false alarms, and it is those who act on these predictions that bear the cost.

Rational optimism suggests that we should question the drivers of economic risks and the pathways to potential crises, rather than simply reacting to predictions.

The speaker advocates for a shift in approach to economic news, suggesting that just as with other consumer products, warnings about potential false alarms should be provided.

In conclusion, the speaker encourages individuals to be rational optimists, to not outsource their judgment to headlines, and to embrace the uncertainty of economic risks.

Transcripts

Do you ever tire of the doom,

the gloom and the false alarms about the global economy?

In public discourse,

the economy always teeters at the cliff edge.

Supposedly, we're just inches away from falling to our economic death.

And surprisingly often, we're told the fall's already begun,

such as in 2020 when the pandemic hit.

We were told there was going to be a deep depression,

the headlines said worse than 2008,

the global financial crisis,

and as bad as the 1930s Great Depression.

But the opposite was true.

A swift and strong recovery.

In 2021,

when the strong recovery pushed up demand and prices,

the doomsayers said there would be forever inflation.

The headlines said a return to the ugly 1970s.

But that didn't pan out either.

After a dramatic squeeze higher, inflation fell.

And then in 2022,

when the Federal Reserve and other central banks

raised interest rates,

the fear mongers came out

and said there was going to be a historic cascade

of emerging market defaults.

But that didn't happen.

In fact, the currencies of emerging markets

performed better against the dollar than those of rich economies.

And then in 2023,

public discourse really wanted to believe in that recession.

The headlines anchored on one word: inevitable.

But there was no recession.

In fact, unemployment on both sides of the Atlantic

was at or near record lows this century.

We have to ask ourselves:

Why the doom?

Why the gloom?

Why all the false alarms?

So I have a few ideas.

Perhaps it's economists like myself.

We're not good at forecasting,

clinging to silly but sophisticated models that fail to predict.

Or perhaps it’s the press that leans into doomsaying.

Financial and economic journalists,

they don't get to write about sex and crime and celebrities,

so perhaps macro doomsaying is a great substitute.

Or is it all of you?

If we're honest, there is some thrill in doomsaying,

and it's in our nature to worry and to obsess.

Well, I think it's all of the above.

And the problem is not the drama that plays out in headlines.

The problem is it comes with real costs for firms, for society, for all of us.

So I've spent my career helping executives

and investors navigate macro risk.

I work with them when they worry about recession,

when they worry about inflation,

about volatility and equity and currency markets and bond markets

and so on.

The one thing I've learned is that they worry most

about the seesawing economic narratives,

such as the ones we've just seen.

There's not just a leadership cost of sending organizations in one direction,

only to revert some time later.

There is also the hard-dollar cost of false alarms.

Think about the automakers.

When the pandemic started,

they thought it was going to be a greater depression,

just like the headlines said.

So they cut their semiconductor orders.

But when instead you got a roaring recovery,

they didn't have the chips that power their cars,

they lost out on production, sales, revenue, profits.

But also there was a scarcity of cars pushing up prices and inflation.

We all bore the cost of that.

Now, against this backdrop of doom and gloom,

we need more optimism.

Not the Panglossian variety, but rational optimism.

I'm not here to belittle macroeconomic risk.

I know it's out there, even the pernicious and systemic kind.

But if we can bring rational optimism to all the volatility,

we can reduce what we experience

and we can sidestep some of the false alarms.

How?

A good place to start is to let go of master-model mentality.

There is no theory.

There is no model that provides the definitive macro answer and forecast.

Unfortunately, economics does not enjoy the stationary law

that allows physicists to close the debate and settle for truth.

Already 50 years ago,

Friedrich Hayek, the Austrian economist,

he criticized fellow economists

for imitating the brilliantly successful natural sciences.

So what went wrong in 2020

when there was a false alarm about a COVID depression?

Turns out, macro models,

they anchor on the unemployment rate to forecast the recovery.

After 2008,

the global financial crisis was followed by years of sluggish recovery.

So in 2020,

when the pandemic hit and unemployment went to 15 percent,

the doomsayers, of course, thought it was much worse,

and the models predicted an even longer recovery.

But the problem was, the models didn't know 15 percent unemployment.

It had never occurred before,

it was not in the empirical base of the models.

So what did they do?

They extrapolated outside the range of their empirical knowledge,

and they failed.

Unfortunately, that is the rule rather than the exception in economics.

An economy like the US has only seen 11 recessions

between the end of the World War II and the start of the pandemic.

Now, each of those was idiosyncratic,

with its own drivers and own idiosyncrasies.

But even if they were homogenous,

11 is still not a sample size that will convince any natural scientist.

So instead of chasing elusive certainty in forecasts,

what we need to do is embrace uncertainty instead.

Now that sounds like a burden.

But instead of feeling small and envious of natural scientists

and that their own world doesn't fit into an Excel sheet,

economists should embrace that diversity of drivers

and they should embrace the messy reality of economics.

And to be extra clear,

if the models had had more empirical bases,

even if they had known 15 percent unemployment,

they still would not have been able to string together

a coherent narrative of that recovery.

What about the brilliantly successful natural sciences?

Turns out they didn't do much better.

The onset of the pandemic was an accidental race

between epidemiologists and economists reading the future.

Epidemiologists, they predicted many million more COVID deaths

that never occurred,

making economists almost look good in the process.

(Laughter)

So what we need is an open, eclectic mind,

not closed for models.

Now, the good news is,

if we let go of master-model mentality,

and if we embrace the uncertainty that is a reality,

we're already more than halfway towards thinking like a rational optimist.

Let me talk about the “rational” in rational optimism first.

Of course, there will be another recession.

There will be another crisis, and it is rational to consider them.

But it is not rational to assume them.

The pathway to the cliff edge.

When we have a narrow analytical lens,

we tend to see only the edges of the risk distribution get stuck there.

When we have a wider analytical lens,

we see broader parts of the risk distribution,

and we’re able to calibrate risk against each other.

There's also a tricky asymmetry.

Big macro crises,

they tend to be low-probability but high-impact events.

But when we conflate the dimensions of probability and impact,

it becomes very easy to have distorted perspectives.

A telltale sign of such distorted perspectives of the doomsaying narrative

is they often cut straight to two questions:

When will it happen?

And how big will be the damage?

But isn’t it more rational to ask: What are the drivers?

What is the pathway to that cliff edge?

And what are the signposts along the way?

Now that leads me to the “optimism” in rational optimism.

Public discourse has always skewed negative,

but we now live in a digital era of a culture where news is entertainment.

The business model of fighting for our eyeballs and our clicks

reliably passes the microphone to the loudest pessimists in the room.

And we never keep them accountable.

Sure, it's impressive when an economist predicted

the 2008 global financial crisis,

until you realize they predicted another dozen meltdowns

that somehow didn't happen.

Remember, a broken clock is right twice a day.

And remember, the doomsayers,

they never bear the cost of their false alarms.

Only those who act on them do.

So where does that leave us?

When you consume goods and services,

you're often warned about their contents.

When you watch a movie, it might say PG-13 or X-rated.

When you open a bottle of wine, it'll say drink with moderation.

But when you take in the news, particularly about the economy,

you're never warned about the false alarms.

Let rational optimism be your warning system.

Remember, for every true crisis, there are many false alarms.

So when the next recession or crisis hits,

let go of the master-model forecasts.

Embrace the uncertainty.

Embrace the distribution of risk.

Ask what takes us to the edge of the risk distribution

and what pulls us back from the brink.

Don't outsource your judgment to the headlines.

Dare to judge for yourself.

In other words, dare to be a rational optimist.

Thank you.

(Applause)