The Economic Uncertainty Principle
February 3, 2003
by Irwin Stelzer
“For if the trumpet give an uncertain sound, who will prepare himself for the battle?” In the face of perceived economic uncertainty, certainly not the Federal Reserve Board’s monetary policy committee, which decided last week that standing pat while the economy passes through a “soft spot” is the wise course. And certainly not President Bush, who offered only lukewarm support for his own misnamed “stimulus package” when he offered the nation his appraisal of the state of the union. And certainly not the seers in the investment houses and on television, who claim that “uncertainty” is so great that they simply have lost the gift of prophesy.
Indeed, several of the nation’s leading CEOs now claim that the future is so “uncertain” that they can no longer offer what analysts call “guidance” as to the likely financial performance of the firms whose destinies are supposed to be in their hands. This is a rather surprising position for executives who are well paid to navigate their companies through economic storms, rather than allow them to be tossed about by uncontrollable forces.
In fact, there is less to the “uncertainty” escape clause than meets the eye. For one thing, there is always a high degree of uncertainty concerning the future course of the economy. “Certainty,” according to my Oxford English Dictionary, means “not to be doubted, disputed, or called in question, . . . [based on] evidence believed to be infallible.” Economists might wish that there were periods of such certainty, but the hard fact is that there aren’t. Which is one of the reasons why forecasters get it wrong as often as they get it right.
More important, it is not obvious that there is as much uncertainty about the future as befuddled seers would have us believe. Start with Iraq. It is about as certain as anything can be that there will be a war. Later this week, Secretary of State Colin Powell will present intelligence data to the Security Council; shortly thereafter, the inspectors will report again. Unless Saddam has turned the reins over to an acceptable successor, their report will provide sufficient evidence to support the Bush-Blair position that Iraq remains in material breach of UN resolutions. A “coalition of the willing” will proceed to unseat him. Sources here say that France is quietly signaling that it will sign on in order to protect its commercial interests in a post-Saddam Iraq. No matter: the war will happen.
Almost equally certain is that it will be won in relatively short order. Top defense officials here tell me that the Iraqi regime will collapse in a matter of weeks, or perhaps even days. Are they certainly right? Of course not. But they are more likely right than wrong. Which brings us to the other alleged source of uncertainty—the price of oil. Here the uncertainty is not very great at all. Oil prices will probably rise when the conflict starts, and then decline to levels that will remove oil prices as a drag on the economies of the industrial nations.
We can also be more rather than less certain about the course of fiscal policy in America. The president’s tax proposals have little chance of passing in anything like the form in which they have been submitted. To Democrats opposed on the grounds that the tax cuts favor the rich, add several Republicans who fear that soaring deficits will lead to an economy-stifling rise in interest rates. The Congressional Budget Office last week forecast shortfalls of $199 billion in fiscal 2003, $145 billion in 2004, and annual deficits of $200 billion “as far as the eye can see,” according to CBO director Barry Anderson.
Oddly, the administration is painting an even bleaker picture. Budget Director Mitch Daniels, who may be attempting to frighten Congress into curtailing some of its pet spending programs, says that the deficit could reach 3 percent of GDP, or around $300 billion. That, of course, doesn’t frighten old Reagan hands, who saw the deficit during his administration reach 6 percent of GDP, followed by a record-breaking period of economic growth.
What all of this means is that fiscal policy will be loose, but not so loose as to provide a significant stimulus to the massive, $10-12 trillion U.S. economy, at least in 2003. Anyone looking to Bush’s stimulus package to push the growth rate up from the miserable 0.7 percent that it registered in the fourth quarter of last year is looking in the wrong place. It will be other forces that come to the rescue.
And anyone looking for booming profits to propel share prices upward had probably best look elsewhere. For one thing, shares remain relatively fully priced, even now. For another, and despite analysts’ forecasts, profits will be hard to come by so long as competition and excess capacity combine to deprive companies of pricing power, and the need to shore up pension plans places a drain on earnings.
All of this can be said with a reasonable degree of certainty. When we move from the unwinnable quest for the holy grail of certainty to the more sensible quest for the probable, the road ahead brightens. Consumers, although reporting that they are less confident than they have been in nine years, continue to spend: real consumer spending rose at an annual rate in the neighborhood of 2 percent in the final quarter of last year. Spurred by rising defense orders, orders for cars, computers, and other durables eked out a tiny 0.2 percent gain in December, with orders for computer equipment up 3.2 percent. Sales of new homes rose 3.5 percent, the fifth consecutive month of good gains. And the leading indicators rose for the third consecutive month.
None of this gets as much attention as such shockers as AOL-Time Warner’s just-reported $100 billion loss, a sum that exceeds the entire GDP of Egypt and of Ireland, and almost equals the GDP of Israel and of Venezuela. But the steady if slow improvement of the inflation-free, increasingly efficient U.S. economy is certainly the more important story.
This article appeared in London’s Sunday Times on February 2, 2003, and is reprinted with permission.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.