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Before settling on a course of action, lawmakers ought to consult the wisdom of the University of Chicago’s “Grand Old Man,” the late Frank H. Knight. His masterwork, Risk, Uncertainty and Profit, offers the intellectual foundation upon which an efficacious program of economic security should be built. An application of Knight’s principles to our current economic distress makes clear that the U.S. confronts not one but two problems: the uncertainty caused by the terrorist attacks and the risk of continuing poor economic performance, the origins of which predate the events of Sept. 11. Congress and the administration therefore need to formulate a broad, multifaceted fiscal package that includes lower taxation and increased infrastructure spending to address both problems. RISK
VS. UNCERTAINTY
The practical difference between the two categories, risk and uncertainty, is that in the former the distribution of the outcome in a group of instances is known (either through calculation a priori or from statistics of past experience), while in the case of uncertainty this is not true, the reason being in general that it is impossible to form a group of instances, because the situation dealt with is in a high degree unique. Sept.11 certainly met Knight’s test of uniqueness. The unthinkable became reality, and the protections long afforded by two oceans were fatally and forever pierced. The ghostly specter of terrorism is unlike any previous national-security crisis. We’ve learned to our horror that small, fanatical terrorist cells, comprised of “sleepers” and supported by malevolent foreign interests, are capable of exploiting the security weaknesses inherent in a free and open society. The all-too-real danger of further terrorist attacks has injected a new and highly unpredictable uncertainty into financial decision-making, afflicting consumers, investors, and executives alike. Companies such as Sun Microsystems report that they can’t even get meetings with customers to discuss new products. The U.S. (and perhaps the rest of the world) is slipping into a period of profound and pervasive financial caution, with a growing propensity to guard assets in safe havens, hoard cash and cash equivalents by deferring non-essential spending, cut costs wherever possible, and eschew risk-taking. These understandable responses to Sept. 11 are a reminder that economics is, as Nobel Laureate R. H. Coase says, “the science of human choice.” But they also threaten to sink the U.S. and global economy deeper into the mire unless prompt fiscal action is taken. Success requires stepped up production and capital spending in anticipation of improved consumer and business demand. “At the bottom of the uncertainty problem in economics is the forward-looking character of the economic process itself,” Knight says. Alluding to French economist Jean-Baptiste Say’s observation that production precedes consumption, he explains: “Goods are produced to satisfy wants; the production of goods requires time, and two elements of uncertainty are introduced. . . . The producer, then, mustestimate (1) the future demand which he is striving to satisfy and (2) the future results of his operations in attempting to satisfy that demand.” Knight further notes that the amount of uncertainty in any situation reflects “the degree of subjective confidence felt in [a] contemplated action as the correct response to the future.” Of the five means of reducing uncertainty that he outlines, one stands out as most appropriate to the current circumstance — namely, “control of the future.” Indeed, Knight himself says that “securing better knowledge of and control over the future” are “the most thoroughgoing methods of dealing with uncertainty.” DO
WHAT WORKS A fiscal package that funds increased federal, state, and local infrastructure spending, along with subsidies and/or tax credits to the private sector to harden vital resources, would act as an economic stimulus — and a confidence-builder, as well. More broadly, other fiscal initiatives are required to relieve the uncertainty wrought by the events of Sept. 11 and get the economy back on track. The best means would be to substitute unmeasurable uncertainty with acceptable risk. Do what works, in other words. Proven fiscal policies, known to produce propitious economic results, should be implemented to provide more confidence in the future. And what is known to work are tax cuts that increase disposable income. Increased personal disposable income would boost prospects for future consumer and business demand, thus stimulating the private sector to raise production and invest in new technologies, plant, and equipment. And lower business taxation would trim costs automatically, providing more free cash for capital expenditures, personnel retention and new hires. An immediate and dramatic increase in both personal disposable income and corporate income would not only raise consumption and investment but also would relieve the psychological pressure to conserve cash. Lower taxation would supply a confidence-building financial cushion. Individuals and institutions would find it easier to make major financial decisions, whether it is buying a big-ticket item, purchasing equities, lending money or making capital expenditures.
— William
P. Kucewicz is editor of GeoInvestor.com
and a former editorial board member of The Wall Street Journal |
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bipartisan support that President Bush has enjoyed since Sept. 11 is coming
to an end as Congress takes up the contentious issue of fashioning a fiscal
package to repair the economy. The White House wants a combination of
supply-side and Keynesian measures, but congressional Democrats are more
inclined to raise federal spending than cut taxes significantly.
