A Fourth Scenario

Posted by on 10/05/09 in Governance, Markets, Stewardship

Last week, the Association of Colorado Independent Schools (ACIS) brought together trustees and heads of school for engaging discussions on governance and financial sustainability. The conversations were intense, collaborative, and at times frustrating because the very issues on the table are so complicated. Yet many attendees seemed to recognize that for independent schools to thrive, leaders of those schools will need to change long-held assumptions about the financial model that drives most independent schools. Rather than simply focusing on getting back to “normal” (as defined by how things were two years ago), many school leaders are striving to develop business models that are more resilient and better positioned for long-term viability.

Perhaps these vibrant learning communities have a mindset that the rest of society needs to adopt, for there is a fatalism amongst economists and policy makers that concerns us.

This week’s The Economist includes a special report on the world economy. On page four of that report, they reproduce a chart (see below) developed by the European Commission that offers three scenarios for economic recovery.

Source: The Economist (October 3, 2009), Report p. 4

As you can see, Scenario 1 indicates a full recovery to previous baseline trends; Scenario 2 reflects a permanent resetting of the baseline with the global economy forever having been stunted by the recent turn of events; Scenario 3 conveys a devastating result: the recent losses permanently reset the baseline AND permanently impair the global economy’s ability to expand going forward. In some regards, the chart above reflects the IMF (International Monetary Fund) charts on the attached Economic Update.

So the question we ask is: Where is Scenario 4? You know, the one where we all get a little wiser and learn to more efficiently and more sustainably increase the rate of economic growth going forward? After all, if current policy is designed to mitigate risk and promote growth, then the baseline should—if anything—reflect more than just a full recovery; it should reflect an improved economy going forward. If it does not, then aren’t we still subject to the same systemic risk we have just experienced?

But we don’t hear about Scenario 4 from any quarter—not from Central Banks nor Treasury Secretaries, neither the major commercial banks nor sovereign wealth funds. While these parties are modifying their own risk profiles and tweaking around the regulatory margins, we are not aware of leadership promoting the objective that would be Scenario 4. That is a problem. For if no one with a high level of access to the hard data about our economic problems is willing to claim that we will come out of this better than we were before (even if it takes 10-20-50 years), then that displays an auspicious lack of confidence.

Rather than striving to get back to a baseline that required massive amounts of loosely monitored leverage, we would much prefer to see an effort made to actually change the shape of the curve on the chart above. Let’s see if we can collectively improve the quality of our economic output net of leverage, net of environmental costs, and net of artificially inflated economic output that is actually the product of redistributed income (locally, nationally and internationally). Perhaps doing so will enable us to make far more progress in eliminating entrenched extreme poverty. As such suffering is mitigated, many other personal and social challenges become easier to address.

Let’s create a Scenario 4 that gives us something meaningful for which to aim. Maybe then, we’ll even hit the target.