For most people uncertainty is an uncomfortable feeling. Yet we are forced to live with it every day. The farmer wonders if rain will arrive in time to save his crop. Many a cancer sufferer lives with the uncertainty of cure or recurrence. The self-funded retiree endures the uncertainty of the stock market. Uncertainty is an ever-present hazard and erodes confidence.
Prediction is fraught with uncertainty. Yet prediction is what we rely on to make important decisions. When an adverse event occurs, we ask what happened, why did it occur, and how can we avoid it recurring. In some instances, such as a road crash, what happened is often obvious, why it has occurred is usually resolved by careful investigation, but how to avoid a similar event may defy even the wisest. In medicine, what has happened, the diagnosis, is often patently clear; why it occurred is largely known; and the outcome, the prognosis, is generally predictable from experience. But sometimes neither diagnosis nor prognosis is certain, so both patient and clinician live with uncertainty until the resolution is possible.
In financial systems, what has happened is usually there for all to see, but why it’s happened is often obscure, complex, and possibly inexplicable, so that avoiding a similar situation is beyond comprehension. Without understanding the cause, no preventive action is possible. This is where we find ourselves with the stock market decline, the global financial crisis, and the economic downturn. We are working within a multifaceted complex financial system which operates like all systems – every part influences every other part.
Given this known complexity, the numerous imponderables, the paucity of reliable information, and sometimes the deliberate hiding of it, it is surprising, even dismaying, that so many voice their opinions with such confidence, such assurance that they understand the problem and have the solution at hand. Some such commentators have prima facie authority because they are economists, or experts in monetary matters; others – politicians, economics correspondents, and sundry columnists, are less well credentialed. But lack of suitable qualifications to give an informed opinion seems to be no barrier to loudly and authoritatively voicing one. This would not be so much of a problem were it not for the fact that no one, no one at all, knows enough to give a reliable opinion. So it’s all hot air, dangerously masquerading as learned comment.
No one knows, not even Warren Buffett, what the stock market will do this week, next week, next year. About all that can be said is that if this market downturn follows the pattern of previous ones, recovery will occur eventually. The trajectory is anyone’s guess. Likewise, no one can predict the trajectory of the economic downturn. We just have to live with the uncertainty. Moreover, the effects of moves made by the Government, such as the bank guarantee, made in a near-vacuum, are not predictable with any real precision. So what a pity it is that so many, qualified or otherwise, try their hand at the hazardous process of predicting. What a shame it is that people make such bold assertions without even rudimentary evidence to back them, and use them to inflict political damage. [more]
Enough of the theoretical preamble – let’s look at some contemporary examples that illustrate how overwhelming uncertainty about the nature of the unfolding events renders prediction hazardous, action challenging and confidence shaky.
We all remember how Chris Richardson of Access Economics insisted that the tax cuts promised by both parties prior to the election and included by the Government in the May budget should be abandoned because they were riskily inflationary. The Government considered the cuts stimulatory and as it had promised them, proceeded anyway. There’s no talk now about the wisdom of that move; the Government insists it got the ‘settings right’. In contrast, the Coalition, not convinced that inflation was such a problem, accused the Government of ‘talking up’ inflation and ‘egging’ the Reserve Bank to raise interest rates. No one has explained how it’s possible to ‘talk up’ a recurring statistic that derives from a complex aggregation of economic parameters, or how it’s possible to ‘egg on’ a fiercely independent body which has its own reputation to protect. John Hewson sides with the Coalition; he regularly criticizes the Reserve Bank for being preoccupied with inflation and that it should have kept rates lower. All the while most other economists were keenly anticipating each rate rise and punting on its size, lauding the Reserve Bank each time it used this monetary lever. Which economist/politician do you believe? Uncertainty about what to do has evoked diametrically opposed views.
Then there’s the issue of the propriety of going into budget deficit if necessary to stimulate the economy. It’s obvious that the Opposition is already mounting a campaign, complete with slogans and reference to previous Labor deficits, to lambaste the Government if it even contemplates going into deficit. Yet economists and well regarded columnists are advising the Government not to hesitate to do so. Who’s right? The columnists are talking like the economists; the Opposition is talking like politicians. Take your pick, but the economists sound more believable. Uncertainty breeds different and sometimes opportunistic outcomes.
Another issue enveloped in uncertainty is the bank guarantee. Malcolm Turnbull and Julie Bishop and a chorus of Opposition spokesmen, along with a trickle of economists, have roundly criticized the Government’s actions. They have been joined by columnists Dennis Shanahan, Glenn Milne, Piers Akerman, Andrew Bolt and other luminaries whose rudimentary understanding of economics and banking would render their criticisms inconsequential, but of course their criticisms are political, masquerading as serious economic comment. The Opposition has now formulated an array of descriptors – rushed, poorly thought through, bungled, exposing the Government’s and particularly the PM’s and Treasurer’s ineptitude, lack of understanding and unsafe naivety. The only alternative offered was by Malcolm Turnbull who would have capped the guarantee at $100,000 and not made it unlimited. Some have agreed, most recently Gail Kelly chief executive of Westpac. No one has ever explained why that approach is the ‘correct’ one. On Sunday’s ABC’s Inside Business it was said that three years was too long for the guarantee, and that it should be withdrawn as soon as possible. ‘Unintended effects’ have been talked about endlessly, but these are different from the anticipated effects, namely the movement of money from non-guaranteed to guaranteed institutions, which were entirely predictable. There has been much to-ing and fro-ing about what should have been done. No one has firmly and authoritatively proclaimed the best course of action, because no one knows. Economists, politicians and columnists have a variety of views. There is no consensus. Uncertainty has overwhelmed conviction, eroded sureness. Why? Because the situation is unique, no one has experienced anything similar; no one has reliable prior knowledge that would endow them with predictive ability. Even if similar circumstances were to occur again would anyone be the wiser?
The thrust of this piece is to underscore the truism that uncertainty is a hazard that leads to unpredictability, which in turn breeds conflict about what to do. That is understandable, but what is not acceptable in such difficult and dangerous circumstances is unthinking unsubstantiated criticism of those whose responsibility it is to make decisions and take what seems to be the most appropriate action. There is no place for uninformed comment or political opportunism when the nation’s financial security is at stake; Paul Keating pointed this out to Malcolm Turnbull is a recent public debate. This is all the more so when the experts themselves, the economists and the finance industry, are unable to agree about how to address the situation.
Some columnists and economists have resisted the temptation to make capital out of the financial crisis. The likes of George Megalogenis, Paul Kelly, Lenore Taylor and Laura Tingle found themselves able to write balanced pieces, and even Rupert Murdoch was stirred to say that the Government had moved sure-footedly in response to the financial crisis. While it might be unrealistic to expect politicians to pass up the opportunity to score political points no matter how serious the situation, it is lamentable that so many columnists are in there boots and all. National unity at these times, and intelligent informed contributions, should be the norm. And when the level of uncertainty dictates that nobody really knows what to do, when no one is able to confidently predict the outcome of any action, remaining silent but supportive, and avoiding the hazard of ill-conceived counsel would be the most valuable and helpful thing to do. Confidence is what we all need; not talking down those responsible for overseeing the economy. Politicians and journalists take heed.