The economic difference between confusion, fear, and panic.
12:00 AM, Sep 27, 2005 • By IRWIN M. STELZER
"IF WE EXPECT LARGE CHANGES but are very uncertain as to what precise form these changes will take, then our confidence will be weak." So wrote John Maynard Keynes in his classic General Theory of Employment Interest and Money in 1936. That might explain why consumer confidence fell 14 percent after Katrina cut a swathe through Louisiana, Alabama, and Mississippi, to its lowest level since 1992.
Like markets, consumers abhor uncertainty. And uncertainty abounds. Weather forecasters are now joined by economic forecasters as the stars of 24-hour business new channels. As the economists dance to the weather forecasters' tune, and revise and re-revise their own forecasts, oil and natural gas prices dance to the economists' tune.
Meanwhile, sober analysts attempt to look beyond these short-term blips, but do little to reduce uncertainty. Well-regarded authorities say we are exhausting crude oil supplies so rapidly that we are on a route to $200-per-barrel, while equally well-credentialed experts expect renewed exploration activity to drive prices below $40.
When the storms abate, the uncertainties do not. The president has said he will spend whatever it takes to restore New Orleans to what some like to remember as its pre-hurricane glory, forgetting that the city was losing jobs and commercial tenants long before the floods came. "Whatever it takes" has already come to over $60 billion, and is likely to exceed $200 billion by the time returnees are rehoused and the president's new war on poverty has been waged.
What forecasters are trying to figure out is how this effort will be financed. If the government simply adds to the deficit, inflation might be triggered by this further loosening of fiscal policy. If, instead, the Democrats prevail and raise taxes, with businesses and high earners the likely targets, economic growth might be slowed. If the politicians decide to postpone the start of the massive prescription drug program, the health care and pharmaceutical industries will feel the pain. And if the relief effort is financed by cutting the road-and bridge-building program, the construction industries will be hurt. No hope for certainty soon.
Then we have heightened uncertainty about the future course of interest rates. Some Fed watchers say the central bank's decision last week to continue raising interest rates is the beginning of the end of that process. Others say that the fact that the price of gold has reached an 18-year high foretells a round of inflation that will force the Fed to continue raising rates. Still others say it is impossible to predict monetary policy when the 18-year rein of Alan Greenspan comes to an end in January. Anyone caring to guess at the future path of interest rates would to well to keep in mind what Keynes called "the extreme precariousness of the basis of knowledge on which [such] estimates" are based.
These uncertainties are magnified by the meaninglessness of the economic data recently made available. Most information was compiled before Katrina struck, wiping out upwards of 100,000 jobs, driving gasoline prices above the $3-per-gallon level, and shaking confidence in the government. It is a reasonable guess that the recovery effort will provide jobs for displaced workers, or that they will find work in the regions to which they have migrated. After all, the Texas economy, to which many New Orleans residents have been moved, creates about 12,000 jobs per month, and the national economy around 200,000.
But only the hardiest forecaster can be certain that the easing of gasoline prices that will occur--well, might occur unless Hurricane Rita wreaks more havoc with Gulf Coast offshore oil rigs and refineries--will restore consumers' interest in big SUVs, or encourage them to resume spending on apparel and other consumer goods. In the last month before Katrina hit, retail sales (cars excluded) rose hardly at all from the previous month, although they were a healthy 7 percent above August 2004 levels. No one seems to know whether the failure of sales to register a month-on-month increase is a warning that consumers are over-stretched, or merely means that they are taking a brief pause before reopening their wallets. Indeed, with the Christmas season almost upon us, forecasters say that they find it difficult to guess the extent to which high gasoline prices will drive consumers from the shops onto the internet.
Or, worse still from the point of view of the economy, whether the 47 percent rise in winter heating costs expected to result from the disruption of heating oil and natural gas supplies, will induce consumers to confine their expressions of Christmas cheer to a card, no gift to follow.
Economic forecasters confess to being increasingly uncertain. In August, economists assigned a 67 percent probability to the accuracy of their projections. In the Wall Street Journal's latest survey of 56 economists, the respondents said the probability that they have it right has declined to 57 percent.
Walter Bagehot once observed that "the early stages of confusion . . . intensify apprehension, and . . . cause panic where otherwise there would have been merely fear." But panic, he added, occurs where there is "a general destruction of all confidence." America is nowhere near that point. The best guess is that after the fog of uncertainty lifts we will see an economy that continues to grow at upwards of 3 percent per year, if not considerably faster. The great American job creation machine remains intact, corporate profits and cash flow continue to break records, fiscal policy is loose and heading to looser, and consumers, so far at least, have not allowed higher gasoline and fuel costs to reduce their desire for bigger and better houses, still affordable in most parts of the country.
Perhaps in the end Americans will agree with Keynes' conclusion, "It would be foolish . . . to attach great weight to matters which are very uncertain," and go about their business unaffected by these new uncertainties.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.