Becker on the Pundits that Cried "Wolf!"
By Bryan Caplan
Why did so many people ignore so many warnings of impending economic crisis? Gary Becker’s got a nice story: We’re usually right to ignore such warnings:
While Roubini and others who warned about weaknesses in the mortgage
market and other parts of the financial system deserve credit for their
foresight, experts predicted numerous disasters during the past several
decades that never happened. For example, after the huge one-day stock
market collapse in October 1987, Business Week and other magazines and
newspapers warned that a Great Depression might soon be coming. I
argued against that view in a column I published in Business Week the
same week as the market crash (reprinted in The Economics of Life by
Guity N. Becker and myself). These dire forecasts turned out to be
completely wrong. Similar highly negative but wrong economic forecasts
were made during the internet bubble, after the Asian financial crisis
of 1997-98 (on this see my post of September 21st), the aftermath of
the 9/11 attack, and after other periods of economic distress. In an
atmosphere where the world economy showed great capacity to withstand
difficult shocks, it is not at all surprising that some forecasts of
disaster that turned out to be more correct were ignored.
So how can we prevent future crises? We already praise the Roubinis who correctly predict bad stuff. To lower the volume, though, we’ve got to spend more time ridiculing the people who predict bad stuff that never happens.
Either that, or we make more public bets…