Interesting passing observation from Yglesias:
[F]or all the horrors of the current recession it’s been managed much better than the Great Depression of the 1930s was. Progress is happening. The only way to make more rapid progress on the science of macroeconomic stabilization would be to have many more recessions so as to gather better data. Paul Krugman emphasizes that to understand the problems facing the American economy today you have to focus on the special economic properties of a large economy in an liquidity trap. But (fortunately), human history isn’t littered with examples of such a situation, so it’s challenging for him to compile a quantity of data sufficient to persuade all of his colleagues.
It seems like this should be generalizable to any disciplines that share two features: (1) They study complex, large scale real-world systems where controlled lab experiments are effectively impossible, at least when it comes to the emergent macro-phenomena, and (2) They are practically effective, in that the evolving state of the discipline powerfully affects how players in the system—here, financiers and regulators—behave within it. (This is basically just Hayek reduced to fortune-cookie size.) As the discipline advances, actors become better at avoiding or preventing undesirable outcomes—but as a result, have less data to guide the response to what shocks do occur. And since those shocks are, by definition, the ones that swamp whatever increasingly sophisticated countermeasures have been put in place to prevent them, they’re apt to be particularly large and severe, with more dire consequences if a particular “experiment” doesn’t pan out. (A similar point is often made about dependence on technology: When it fails it often turns out the once-commonplace skills or knowledge we’d previously used to get by have failed.)
This isn’t a perfect analogy, but the problem made me think of forest management, it’s long been understood that attempting to wholly prevent forest fires is usually a bad idea—the dry growth builds up until the fires you don’t manage to prevent quickly rage out of control, to far more devastating effect. Instead, we have periodic “controlled burns.” I suppose live vaccination is another example of the same idea: Deliberately expose enough of the population to a weak pathogen at staggered intervals (sometimes causing mild symptoms) and a serious epidemic becomes much less likely. (Though this, too, creates the same trade-off a level up: When an epidemic does happen, the society that’s done a good job at prevention may be ill-equipped to respond.)
Obviously, it would be perverse for any number of moral and practical reasons (not to mention a political non-starter) to suggest deliberately creating small economic crises, whether the purpose was to gather data, experiment with different policy responses, or create some kind of general vaccine effect (whatever that might mean). But it might be worth counting this as one possible cost of policy designed to preserve macroeconomic stability. The nature of the problem, alas, is that it’s probably impossible to estimate the magnitude of the cost very well, precisely because you don’t the counterfactual.