Dealing with Black Swans

A Princeton economist convincingly shows that human enterprise and innovation could yet cope with them successfully

The Resilient Society: Economics after Covid

Author: Markus K Brunnermeier

Publisher: HarperCollins

Pages: xiv + 412 pp  

Price: Rs 699

Nassim Nicholas Taleb called the 2008 subprime meltdown and the subsequent economic crisis a black swan event, signifying its rarity. Black swans as birds exist in significant numbers, as are black swan events more common than assumed earlier, something Taleb himself underlined. A little over a decade later another anomalous event, the Covid-19 pandemic, caused a far greater shock to the world economy. Markus K Brunnermeier, professor at Princeton Uni­versity, says in his book under review, “In the future, [it] will probably be considered one of the rare tragedies that had far-reaching consequences.” That understatement is typical of the author’s style, eschewing dramatic ass­ertions, except when absolutely unavoidable. This moderation is only one of the virtues of this gem of a book and a relatively minor one at that.

The title describes precisely and entirely what the book is all about. It is a thorough case study of the United States’ economy during the pandemic (early 2020 to mid-2021). But that is not all. Not only does the book cover all aspects of the individual and social behaviour impacting, and being impacted by, the economic variables, but also tries to explore causal relationships that underlie the observed phenomena. That also permits an attempt to extend the analysis to other regions and countries affected by the pandemic shock — which covers the entire world.

Central to the analysis is the concept of resilience, as compared to the term normally used to describe strong economies, robustness. This is illustrated thus by the author: The oak tree epitomises robustness. It stands erect with any but the most severe gale. It is robust because of its bulk. By contrast, the far slenderer reed, too, withstands gales, by bending with the wind and regaining its uprightness once the gale dies down. Robustness comes at a cost of resources and time: Ancient pyramids were built with enormous amount of mostly solid rocks using armies of slaves over long periods. By comparison, modern skyscrapers tend to use far less material. “The Willis Tower in Chicago can sway up to three feet from side to side on a windy day.” In the context of Covid, various types of economic recoveries, from sharp V-shaped to K-shaped, have been discussed. As professor Brunnermeier convincingly explains, they are all manifestations of resilience. His linking of resilience to sustainability and growth is equally persuasive.

The book examines effects of the pandemic on almost all possible activities: Industrial production, consumption, savings, investment, government spending and stimuli to individuals and sectors of the economy, employment, public health and education. Income distribution and equality also get adequate attention, as do social cohesion, especially racism in the United States. At all times, the author makes a serious case how lessons learnt from the 2008 recession have shaped the response later in dealing with a much stronger and far more widespread shock. Various theories, including Modern Monetary Theory, are lucidly discussed whenever appropriate.

The book uses data from many sources, mostly official, to explain the impact of the pandemic and its aftermath, but it never becomes so data-heavy as to affect its readability. The list of references is exhaustive, and appropriate citations from them help propel arguments further. Use of appropriate but not intrusive graphics drives the author’s conclusion home (A minor quibble: The author uses various forms of emphasis — italics, bold face — rather liberally to make his point. This may be a good presentation strategy, but it is a bit irritating to a serious reader.)

So, what is resilience? It is not doing whatever it takes, according to the author, but “having extra spending capacity in bad times, which requires the build-up of redundancies in good times. In other words, being frugal in good times is an essential part of resilience”.

India figures in the discussion, mostly in the context of the harsh lockdown and the severe second wave. An interesting takeaway for this reader concerns the size of the stimulus package. What India did was considered as too little by many, including this reviewer at that time. But as the consensus builds up that the US stimulus was too large in economic terms (but unavoidable politically) and laid the foundation of the present inflation, our possibly blundering into a more modest one may have been a blessing in disguise as we combat our own inflation.

The book was originally published last year in the United States. At that time, the Covid situation seemed to be coming under control and the economies returning to some sort of normalcy the world over. Since then, there have been many changes — Covid variants have caused distress and lockdowns in several parts of the world, the economic recovery has been uneven. The Chinese single-minded pursuit of the zero-Covid policy continues to cause worldwide supply chain disruptions and forces us to move from just-in-time to just-in-case thinking mode.

Most important of all, the Russian invasion of Ukraine of the last 100-plus days has been an unprecedented dislocator of economic and political normalcy for the entire world. It is early days yet, but the gravity of the crisis grows by the day. In this current week itself, both the World Bank and OECD have revised growth forecasts for the global and national economies substantially downward. It is small comfort to India that its growth rate may be the highest in the war-affected world, but we start from a relatively low base. Our ambition of reaching a $5-trillion economy will recede further into the future in a de-globalising scene. Food exports negatively impacted by the war could lead to a looming spectre of famine and hunger, especially in the poorer world.

The great merit of the book is that these entirely unanticipated changes and shocks do not detract from its readability, and more importantly, its value as a guide to deal with precisely such events. For example, we need to think anew about the consequences of excessive European dependence on Russian oil and gas. Food security, too, deserves a fresh, global approach.

Such a flock of black swans may never have been encountered before, but professor Brunnermeier convincingly shows that human enterprise and innovation could yet deal with them successfully.