Straightforward tricks on how to Reside With Economic Doomsaying | Philipp Carlsson-Szlezak | TED

Do you ever tire of the doom, the gloom and the false alarmsabout the global economy? In public discourse, the economy alwaysteeters at the cliff edge. Supposedly, we're just inches awayfrom 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 bea 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 recoverypushed up demand and prices, the doomsayers saidthere would be forever inflation. The headlines saida return to the ugly 1970s. But that didn't pan out either.

After a dramaticsqueeze higher, inflation fell. And then in 2022, when the Federal Reserveand other central banks raised interest rates, the fear mongers came out and said there was going to bea historic cascade of emerging market defaults. But that didn't happen. In fact, the currenciesof emerging markets.

Performed better against the dollarthan those of rich economies. And then in 2023, public discourse really wantedto believe in that recession. The headlines anchoredon one word: inevitable. But there was no recession. In fact, unemploymenton 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 sophisticatedmodels that fail to predict. Or perhaps it’s the pressthat leans into doomsaying. Financial and economic journalists, they don't get to write about sexand crime and celebrities,.

So perhaps macro doomsayingis a great substitute. Or is it all of you? If we're honest, there is somethrill in doomsaying, and it's in our natureto worry and to obsess. Well, I think it's all of the above. And the problem is not the dramathat plays out in headlines. The problem is it comes with real costsfor firms, for society, for all of us. So I've spent my careerhelping executives and investors navigate macro risk.

I work with them when theyworry about recession, when they worry about inflation, about volatility and equityand currency markets and bond markets and so on. The one thing I've learnedis that they worry most about the seesawing economic narratives, such as the ones we've just seen. There's not just a leadership costof sending organizations in one direction, only to revert some time later.

There is also the hard-dollarcost of false alarms. Think about the automakers. When the pandemic started, they thought it was goingto be a greater depression, just like the headlines said. So they cut their semiconductor orders. But when instead you gota roaring recovery, they didn't have the chipsthat power their cars, they lost out on production,sales, revenue, profits.

But also there was a scarcity of carspushing up prices and inflation. We all bore the cost of that. Now, against this backdropof doom and gloom, we need more optimism. Not the Panglossian variety,but rational optimism. I'm not here to belittlemacroeconomic risk. I know it's out there,even the pernicious and systemic kind. But if we can bring rational optimismto all the volatility, we can reduce what we experience.

And we can sidestepsome of the false alarms. How? A good place to start is to let goof master-model mentality. There is no theory. There is no model that providesthe definitive macro answer and forecast. Unfortunately, economicsdoes not enjoy the stationary law that allows physicists to closethe debate and settle for truth. Already 50 years ago, Friedrich Hayek, the Austrian economist,.

He criticized fellow economists for imitating the brilliantlysuccessful natural sciences. So what went wrong in 2020 when there was a false alarmabout a COVID depression? Turns out, macro models, they anchor on the unemployment rateto forecast the recovery. After 2008, the global financial crisis was followedby years of sluggish recovery. So in 2020,.

When the pandemic hitand unemployment went to 15 percent, the doomsayers, of course,thought it was much worse, and the models predictedan even longer recovery. But the problem was, the modelsdidn't know 15 percent unemployment. It had never occurred before, it was not in the empiricalbase of the models. So what did they do? They extrapolated outside the rangeof their empirical knowledge, and they failed.

Unfortunately, that is the rulerather than the exception in economics. An economy like the UShas only seen 11 recessions between the end of the World War IIand the start of the pandemic. Now, each of those was idiosyncratic, with its own driversand own idiosyncrasies. But even if they were homogenous, 11 is still not a sample sizethat will convince any natural scientist. So instead of chasing elusivecertainty in forecasts, what we need to dois embrace uncertainty instead.

Now that sounds like a burden. But instead of feeling smalland envious of natural scientists and that their own worlddoesn't fit into an Excel sheet, economists should embracethat diversity of drivers and they should embracethe messy reality of economics. And to be extra clear, if the models had hadmore empirical bases, even if they had known15 percent unemployment, they still would not have beenable to string together.

A coherent narrative of that recovery. What about the brilliantlysuccessful natural sciences? Turns out they didn't do much better. The onset of the pandemicwas an accidental race between epidemiologists and economistsreading the future. Epidemiologists, they predictedmany million more COVID deaths that never occurred, making economists almostlook 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 embracethe uncertainty that is a reality, we're already more than halfwaytowards thinking like a rational optimist. Let me talk about the “rational”in rational optimism first. Of course, there will beanother 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 edgesof the risk distribution get stuck there. When we have a wider analytical lens, we see broader partsof the risk distribution, and we’re able to calibraterisk against each other. There's also a tricky asymmetry. Big macro crises,.

They tend to be low-probabilitybut high-impact events. But when we conflate the dimensionsof probability and impact, it becomes very easyto have distorted perspectives. A telltale sign of such distortedperspectives of the doomsaying narrative is they often cut straightto 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 alwaysskewed negative, but we now live in a digital eraof a culture where news is entertainment. The business model of fightingfor our eyeballs and our clicks reliably passes the microphoneto the loudest pessimists in the room. And we never keep them accountable. Sure, it's impressivewhen an economist predicted the 2008 global financial crisis,.

Until you realize they predictedanother dozen meltdowns that somehow didn't happen. Remember, a broken clockis right twice a day. And remember, the doomsayers, they never bear the costof 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 warnedabout the false alarms. Let rational optimismbe 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 edgeof the risk distribution and what pulls us back from the brink. Don't outsource your judgmentto the headlines. Dare to judge for yourself. In other words, dare to bea rational optimist. Thank you. (Applause)

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