Wednesday, December 17, 2008

Revenge of the Optimists

Things are pretty bleak now, but one has to put this in perspective. As Flaubert noted, our ignorance of history makes us libel our own times. People have always been like this. Looking back, we think there was little uncertainty in the past, because we know how it ends, and think it couldn't have been otherwise, so FDR defeated Hitler, and Reagan won the cold war (or Hitler started a stupid two front war, and the Soviet Union was doomed). But in reality, there's always a feeling that civilization is like an individual, and so decay and senescence is inevitable. In the thirties, the end of capitalism. In the fifties, a return to the Great Depression, or nuclear annihilation. In the seventies, we were running out of oil and food, and capitalism was imploding. Etc.

So now, credit has backed up because no one believes all those assumption the took for granted, and 'Investment Grade' does not facilitate no-decision lending. But life in 10 years will probably be more of the same. But the economy will come back, and the optimists have been generally right over the past 200 years. It's easy to be a pessimist, because there are a million things that can go wrong, but even Rome took centuries to fade away. I see the US heading towards a Brazil model, with pockets of extreme poverty and anarchy like Detroit and nice gated communities like the suburbs that keep the poor out implicitly through high housing prices. But that will take decades.

I tend to think the permabears who seem so prescient right now are generally cranks. Consider the problem of testing for rare conditions. If an HIV test has a 2% false-positive rate, but only 1 in 1000 people have HIV, then 20 people will get a positive result out of 1000 healthy people, while only 1 actually has HIV. If you get a positive HIV test, you still probably don't have HIV (this supposes you didn't take the test because you just had passive anal sex at a weekend heroin party in Haiti). Similarly, given the false positive rate for permabears, and the relative infrequency of crashes, most permabears were lucky; some weren't, but to sort that out you need to assess their reasoning, not just their predictions. So, listening to these guys is depressing, because they have more credibility now, but while their stature should increase via Bayes rule, it should still be observed skeptically. I'm just hoping the new administration doesn't do an FD Roosevelt and in a rush to do something make things worse, by bringing back cartels and monopolies via card check, bolstering unions.


Eric Falkenstein said...

Interesting comment. I don't think I'm arrogant, and try to reserve my character remarks to people who I feel are arrogant themselves, figuring if they dish it out they deserve it when they misspeak (or more likely, they call it envy and dismiss it). But perhaps people who read this blog think I'm arrogant.

Anonymous said...

er, not yours. i was referring to americans' arrogance in general. you're ok :)