Storm clouds build as doubt dominates policy decisions
Economic outlook
October 12, 2009
By Caroline Baum
Everywhere you look, there's uncertainty. Uncertainty plays a key role in central bankers' policy deliberations. The US Federal Reserve says there's "considerable uncertainty" about the strength of the recovery.
In the euro zone, "uncertainty remains high", European Central Bank president Jean-Claude Trichet said on September 3. He further categorised uncertainty as "ongoing" and "a major factor" in the outlook.
The uncertainty principle has infected academia, too. "There's too much uncertainty out there," Massachusetts Institute of Technology labour economist Thomas Kochan said, explaining his doubts about an imminent increase in job openings.
The ghost of uncertainty haunts financial markets. Analysts remind us how much markets hate uncertainty. (They hate it a lot more when prices are falling.)
Stock investors make trading decisions in the face of uncertainty over corporate earnings. Businessmen contend with chronic uncertainty over what and how much to produce. Consumers deal with uncertainty when they choose between an adjustable and 30-year, fixed-rate mortgage.
Uncertainty as a policy or planning variable is a lot more prevalent in bad times. Which leads me to believe uncertainty is a euphemism for pessimism.
When central bankers say the outlook is uncertain, they mean they see heavy storm clouds overhead. The banking system is still on life support. The consumer is buried under a mountain of debt.
Yet unlike central bankers, who are victims of uncertainty, their fiscal counterparts brim with confidence over their initiatives and assuredness over the outcome.
Take the so-called cash for clunkers, a two-month programme offering rebates of as much as $4 500 (R33 500) to US consumers who traded in their gas-guzzlers for new, more fuel-efficient cars.
Transportation Secretary Ray LaHood called it "a wildly successful programme". President Barack Obama said it was "successful beyond anyone's imagination".
Never mind that the government grossly overpaid for the environmental benefit of turning crap to scrap. After a spike to 14.1 million in August, US motor sales slumped to 9.2 million at a seasonally adjusted rate in September. That's close to the 28-year low of 9.1 million in February.
Then there's the $787 billion fiscal stimulus, which saved or created 1 million jobs by August, according to the White House Council of Economic Advisers (CEA).
Since February, the US has shed 2.7 million non-farm jobs, and the unemployment rate has jumped to 9.8 percent from 8.1 percent. The CEA said the labour market would have been worse without the stimulus. There is no way to test such assertions.
CEA chairman Christina Romer wasn't always such a devotee of fiscal stimulus. As an economic historian she examined the Great Depression in a 1991 paper for the National Bureau of Economic Research. Romer found that "monetary changes" in the periods 1933 to 1937 and 1939 to 1942 were "crucially important to the recovery, while fiscal policy had very little effect".
Why uncertainty afflicts economists at the central bank and not those that work for the administration, I can't say. I doubt all that euphemistic uncertainty is doing the public any good.
So here's my advice to central bankers. Get with the confidence game, I mean, programme. Hold your heads up and put some swagger in your step. Talk with some of that old fiscal policy assurance.
Caroline Baum is a Bloomberg columnist. The opinions expressed are her own.
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