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Altitude Sickness

Altitude Sickness

The World Economic Forum (WEF) meeting — aka Davos — is upon us again. I, like all foreign policy fashion mavens, am looking forward to seeing which fleece vest Thomas Friedman will showcase on the ski slopes this year. But the substance of Davos is a different matter altogether. The cycle of reaction to it has yinged and yanged over the years. Some commentators take it very seriously and see the elite meeting as a threat to national identity or democratic politics. At the same time, it’s been pretty hard to take the event seriously as of late. When the Arab Spring erupted while Davos was taking place in 2011, it signaled that perhaps the center of gravity in world politics wasn’t necessarily on the Swiss ski slopes. Individual commentators also go through their own cycles, starting with fascination and then — after repeatedly not getting invited turning to mockery of the confab of world leaders, multinational CEOs, and Bono.

With this kind of variation, it’s difficult to get a grip on what to think about Davos. For every insufferable tweet from an attendee, there’s the occasional story that makes you think more positively. So here’s a simple rule of thumb: the World Economic Forum matters only when its attendees collectively get something wrong. Which is surprisingly often.  

According to official Davos lore, Klaus Schwab started the group in 1971 to create a forum for businesses to be accountable to stakeholders as well as shareholders. As a result, according to the website, Davos, has "considerable impact in improving political, economic and social awareness, acting as a catalyst for major bridge-building efforts." Indeed, as a focal point for having the world’s movers and shakers in the same place, Davos probably offers some limited utility — though far less than it used to. In the pre-Internet, Cold War era, one could see the value-added of getting people in the same room to power schmooze. In the current era, however, these benefits are significantly reduced. Davos is merely one of a cornucopia of elite summits that take place each year. There is no longer a shortage of opportunities for corporate and political leaders to find ways to chat.

On the other hand, none of these other summits are quite as large as Davos — and therein lies the problem. In getting such a large number of elites in the same place, the opportunities to inculcate global groupthink becomes more likely. Everyone get exposed to the same kernels of insight from speakers and fellow attendees. In an ideal world, these insights are correct, which means that Davos attendees get useful information to form political and corporate strategies. This sounds great, but if you think about it for a second, it’s also superfluous. One is hard-pressed to believe that either Goldman Sachs or the People’s Republic of China will acquire some nugget of data at Davos that their information-gathering apparatuses somehow missed.

In the world we live in, the likelier outcome is that the collective schmoozing leads to something more pernicious — the development of collective misperceptions about the state of the world. This is certainly a live possibility. As Chrystia Freeland has documented, the thing about Davos is how its attendees are more likely to identify with each other than ever before. Psychology 101 says that people are more receptive to believe information they acquire from like-minded people. As a result, it becomes easy for one anecdote about a Chinese nationalist at a dinner party or a comment to a Financial Times columnist to metastasize into the collective belief that war is just around the corner in the Pacific Rim.  

How often can this really happen, though? If attendees get invited to Davos because they’ve succeeded in their chosen field, then surely they’re less likely to develop ill-informed impressions of the state of the world, right?

Hardly. A glance at the World Economic Forum’s own outputs suggest that the worst kind of groupthink is, in fact, quite likely. Consider that in 2009, the overarching concerns were a hard landing for China and a further collapse in asset prices — neither of which happened. In 2010, the WEF harped on fiscal unsustainability in the developed world — not Greece, mind you, but that the United States and Britain needed to get their deficits in order. In 2011, the WEF’s big Global Risk report failed to identify the imminent Arab Spring. The WEF’s 2012 report stressed the problem of macroeconomic imbalances as the biggest risk — and yet, a year later, the McKinsey Global Institute reported that those balances had declined by more than a third over the previous five years. One could argue that these problems ceased to be crises because of the siren song of Davos — except that both the U.S. federal budget deficit and macroeconomic imbalances were already trending counter to the WEF’s warnings. Furthermore, ever since the 2008 financial crisis, the WEF’s risk reports have consistently underestimated the economic capabilities of the United States and overestimated the gridlock in global governance — when a closer look reveals the resilience of U.S. hegemony and the functionality of multilateral institutions.

This year is little better; indeed, the message from Davos is becoming more incoherent. Klaus Schwab warned about the dangers of further quantitative easing from the Federal Reserve, noting that "its downsides are now apparent." At the same time, however, he lamented that "inflation is too low and unemployment is too high" in the United States. This adds up to a rather contradictory kind of Schwabian economics — how the U.S. should simultaneously curtail quantitative easing while boosting the inflation rate is a challenge that would baffle most economists.

The WEF’s emphasis on fiscal and monetary austerity in recent years is troubling. If Davos reinforced the push toward austerity in the developed world, then it exacerbated a mistaken and damaging consensus about the virtues of such policies in the wake of a financial crisis. Of course, such policies likely would have been advocated anyway. But Davos didn’t help matters — it hurt. Which is probably a slightly different legacy than Klaus Schwab and the World Economic Forum intended. In this, the Davos elites are no worse than the other financial and populist groups that pushed for these counterproductive policies. But the Davos elites are no better, either.