An age of uncertainty
The author is a professor of economics at Korea University.
Can anyone accurately foresee what will happen three months from now? Will the economy get better? What about stocks? Will real estate prices come down? Few can confidently say because of a great many uncertainties.
The Covid-19 situation is unpredictable due to the rise of a new variant called Omicron. Many countries have sealed borders again. Supply bottlenecks have disrupted the global economic recovery.
After trying to go back to normal, Korea is tightening restrictions in the face of a surge in infections and critically-ill patients. If consumption is dampened and exports take a hit from slowed global economic growth, a recovery for the Korean economy may not be easy. Political uncertainties add to the woes. No one can predict the outcome of the presidential election three months ahead — or its aftermath.
In his 1977 book “The Age of Uncertainty,” Harvard economist John Kenneth Galbraith found that few economists, capitalists or socialists had conviction about the economy as they did in the past and that society was lacking a guiding direction. In a 2017 column, Barry Eichengreen, a professor of economics at the University of California, Berkeley, wrote we are living in “The Age of Hyper-uncertainty.” At the time, the United States under President Donald Trump prioritized American interests, the British were breaking out of the European Union, and the rise of China disrupted the international order, all deepening the clouds of uncertainty.
Four years later, the precarious climate around the world has worsened. The conflict between the U.S and China has intensified, and there is no sign of intergovernmental cooperation to address global issues in commerce, climate change, and denuclearization. Countries have carried out unprecedented fiscal and monetary expansions to fight the worst pandemic in a century, resulting in colossal debt. How or if conditions will normalize and what may happen in between cannot be known.
Predicting the future in an ultra-uncertain period is equally difficult for economic pundits. Economists generally are lacking an ability to forecast the future. Galbraith famously said, “The only function of economic forecasting is to make astrology look respectable.” In other words, economists can be worse than astrologists in predicting the economy.
There are two typical approaches in economic forecasting. One is to study the behaviors of households, corporations, and government based on economic theory. It is hard to accurately measure the behaviors of economic participants, who can be irrational and unreasonable. Another methodology is to base a study on past data. Overall, predicting the future from hundreds of variables and correlations cannot be easy.
Central banks, world banks and other institutions tend to combine the two approaches in their estimates. But their endeavors can be upset by contingencies such as a variant of the Covid-19 virus. Even in predictable events, the consequences can pan out differently as the exact scope and impact cannot be known.
Decision-making must become extra prudent during volatile times. Confirmation bias by cherry-picking information that serves one’s wishes when views are mixed about economic conditions can be highly dangerous. Self-restraint so as not to become over-confident is also important. One must manage risks at times of uncertainties to weather the storm and come back with resilience.
Everything from politics to economics and external conditions is uncertain. But one thing is for sure. Three months later, the spring will be here. Let’s hope that a warmer climate for the economy arrives as well.