“All we have to be uncertain about is uncertainty itself.” That is how a latter-day Franklin Roosevelt might describe the economic situation in the United States today.
Unlike 1933, when FDR was inaugurated, unemployment is not at record levels, nor are banks failing left and right. We may be in a recession, but here in the Upper Midwest it is not yet a painful one by historic standards.
Yet just as in 1933, an intangible factor – then fear, now uncertainty – arguably poses the greatest challenge. Unfortunately, there is no clear way anyone can wave a magic wand and dispel today’s uncertainty.
In its formal definition, uncertainty refers to a lack of definitive knowledge about some event or state of being. Economists generally have in mind a more specific meaning, first explained decades ago by Frank Knight, an economist at the University of Chicago.
Knight said there are two ways we can lack knowledge about the future. The first way is when we do not know what will happen tomorrow or next year, but based on historical or natural patterns, we can form some reasonable expectation of the range and likelihood of what will happen.
For example, we do not know how much snow we will have this winter, but based on more than a century of weather records, we can expect that it is likely to be more than 20 inches and less that 120.
A knowledgeable climatologist like my neighbor Mark can refine that further and estimate specific mathematical probabilities of expected snowfalls, i.e. we can be 90 percent sure that it will be more than X inches and less than Y inches.
We still don’t know how much snow we will actually get, but we know enough that someone will bid on plowing our alley, the city knows about how much salt to buy for icy streets, the hardware store can order shovels and snow blowers and so forth.
Knight labels as risk this sort of unsureness about the future. Risk can usually be insured against. We don’t know whether a St. Peter or a Comfrey will be hit by a tornado in any year, but people in those towns can buy property insurance that covers wind damage because we have historical weather and damage records.
Other lack of knowledge about the future, those possibilities about which we have no basis for estimating any likelihoods, Knight called “uncertainty.” We are uncertain if Osama bin Laden has nuclear weapons. We are uncertain if scientists will discover successful cold fusion or a cure for cancer. We do not know if a previously unknown disease, such as AIDS or Ebola, will break out somewhere. We do not know, and we cannot estimate the likelihood.
Uncertainty is more insidious than risk precisely because there are no financial instruments, such as insurance, to reduce it. Uncertainty is hurting our economy right now because both businesses and consumers are hesitant to venture investments or discretionary spending when we don’t know what the next months and year will hold but fear that it may be bad.
Consumers instinctively shrink from buying a new car or refrigerator if the old one still works and they are worried about getting laid off in a few months. Retail stores hesitate to hire additional staff if they may have to lay off existing workers in a few months.
Excavating contractors hesitate to buy a new front-loader or bulldozer if they worry that there may be no new housing tracts to sculpt next spring. Professional couples balk at making reservations for a late February cruise if they are not assured that it will be safe to fly.
Confidence-sapping uncertainty was highly evident on Monday when an American airliner crashed in Queens, NY, just a few minutes before the opening bell of the New York Stock Exchange. Fear that this might be another act of war, an escalation of the campaign begun on September 11, struck the heart of many of us. And stock prices tumbled until there was some evidence that it was an ordinary accident.
We do live in an uncertain world – one that is far less cozy than many assumed it was three months ago. There really is not much that President Bush or any other public leader can do to dispel such uncertainty.
Eventually this uncertainty will diminish, or we will regain confidence in the face of it, and there will be less of a pall hanging over household and business financial decisions. But in the meantime, it will continue as an unwanted brake on the production of goods and services.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.