To truly prepare for a “Black Swan,” a shift in perspective is needed
Updated: Aug 25, 2022
Within professional settings, the phrase “Black Swan” is used to describe a sudden and formative event that marks a sharp geopolitical, economic or societal turn. What, then, can be done to prepare for such an event?
In the winter of 2019, a few months before COVID-19 burst into our lives, I spoke with a key player in the Israeli economy. During our conversation, I shared a thought: What if the Israeli economy is on the brink of a crisis and we just don’t know it yet? Of course, it’s not like I knew something that everyone else on the planet didn’t. At the time, I was following the unemployment rate in the U.S., because rising unemployment is a good indication of an economic crisis and a crisis in the U.S. – as we all know – affects many other countries, including Israel.
Two and a half years ago, the unemployment rate in the U.S. was very low (3.6%), following an almost decade-long decline from the peak that resulted from the financial crisis of 2008. So, why was I worried? Well, because of the combination of two indicators that suggested that unemployment in the U.S. had reached its lowest point and that, from here on out, it could only go up. First, unemployment in the U.S. cannot fall much below 3.6% due to frictions such as the time it takes unemployed workers and firms to find each other. And second, the unemployment rate almost always follows a cyclical pattern.
Unemployment in the U.S. has indeed risen since that conversation I had back in 2019, but not for the reason that I would have guessed. An event external to the economy – a global pandemic to be exact – caused it to rise, within months, to 14.7%. The easing of the pandemic and the end of the closures restored the downward trend of unemployment, bringing us back to a rate of 3.6% as of last May. This figure has, for the time being, remained stable despite another twist (again, external to the economy) – the Russian invasion of Ukraine and the global rise in inflation.
An important insight we got about the economy from the COVID-19 pandemic is that we – the public, the authorities, the state – are not prepared for extreme scenarios. Looking back, the Israeli economy, quite surprisingly, endured the coronavirus crisis reasonably well (on the whole, on an individual level it’s a different story), and therefore it did not actually resemble the crisis that I feared at the end of 2019.
The problem is that extreme scenarios are, by their very nature, events that are very difficult to predict or to gauge the extent of damage that they will cause. A “Black Swan,” as it’s referred to in professional settings, is a seminal event that marks a sharp geopolitical, economic, or societal turn, and it is impossible to predict its arrival on the basis of current information. I suppose that Israel has all kinds of contingency plans for such cases, but as COVID-19 showed us, sometimes we don’t even know what to prepare for.
As we consider the upheavals that occurred in the world over the last hundred years, and the bleak scenarios that await us due to the climate crisis alone, we understand that a “Black Swan” may attack us at any given moment. So, what can we do to prepare for it? Modern economies rely on global markets and domestic and foreign collaborations. As long as those work properly we can expect prosperity. However, those factors also make our economies more complicated and create risk factors. Therefore, forfeiting some gains to create reserves, as well as to allocate resources toward investing in infrastructure, strengthening human capital, or addressing problems such as inequality, would be an excellent guiding principle in these preparation efforts.
This cannot and will not occur without a dramatic shift in perspective about a society’s objectives – a shift from a society that aims the majority of its economic growth toward excessive consumption to a society that allocates resources toward preparing for future negative events and toward addressing its weaknesses. After all, at any given moment there may be a Black Swan drifting towards us that, from a historical perspective, will make the COVID-19 pandemic look like nothing more than a warning. But, even if that is not the case and something worse doesn’t come our way, we can still look back and know that we did everything we could to improve our resilience. In any case, the outcome will be in our favor.