Learning to live in a Donald Rumsfeld world (Part 2)

A world of known-knowns, known-unknowns, and unknown-unknowns… it might make one won­der if we have all some­how passed through Lewis Carroll’s look­ing glass. And yet for plan­ning pur­poses, Don­ald Rumsfeld’s path to under­stand­ing the var­i­ous fac­tors that could impact the future can be remark­ably illuminating.

Last week’s col­umn dis­cussed three major known-knowns that will likely leave America’s short-term eco­nomic out­look quite mod­est, includ­ing a largely impo­tent Fed­eral Reserve, dead­locked fis­cal pol­i­cy­mak­ers and a slow­down among many pre­vi­ously fast-growing economies around the world.

That, of course, brings the analy­sis to the known-unknowns, which is to say, fac­tors which can be iden­ti­fied that will shape the U.S. eco­nomic per­for­mance, but which remain a mys­tery as to pre­cisely what direction/form their influ­ence will take. At least three known-unknowns can be eas­ily identified.

First and fore­most on the list of known-unknowns is the euro-zone cri­sis and its out­come for this year and beyond. In the last cou­ple of weeks, it might seem as though some clar­ity has been brought to this issue. Ear­lier this month the Greeks voted, in essence, to remain a part of the euro-zone and accept their bailout oblig­a­tions via aus­ter­ity mea­sures related to gov­ern­ment spend­ing and tax­a­tion. But at the same time, the new gov­ern­ment of Greece indi­cated a desire to rene­go­ti­ate some por­tions of the aus­ter­ity pro­gram, the form of which remains unknown at this time. As well, the French elected a Social­ist pres­i­dent who sug­gested that aus­ter­ity mea­sures should take a back­seat to pro­mot­ing eco­nomic growth. This could well leave fund­ing orga­ni­za­tions such as the IMF (Inter­na­tional Mon­e­tary Fund) and the EFSF (the Euro­pean Finan­cial Sta­bil­ity Facil­ity) in a quandary as to how they can jus­tify allow­ing at-risk nations to expand the government’s role at a time of required deficit/debt reduction.

Within the euro-zone, Spain and Italy are increas­ingly vul­ner­a­ble to economic/financial prob­lems. Spain recently announced the need for up to a 100 bil­lion euro res­cue of their banks, and both nations are expe­ri­enc­ing a wor­ri­some increase in bor­row­ing costs given the uncer­tainty of their fis­cal posi­tions. While far more could be said of the sit­u­a­tion (such as the bailout needs of Cyprus), all euro-related issues point to a con­tin­u­a­tion of unknown out­comes to this known prob­lem, with some people/businesses likely putting off deci­sions until some clar­ity occurs.

The U.S. also has its own known-unknown gov­ern­ment mat­ter; what is being called the “fis­cal cliff” the coun­try faces at year’s end. On Dec. 31, a num­ber of tax increases and spend­ing cuts will occur unless Con­gress and the pres­i­dent reach some sort of agree­ment in the cur­rent highly politi­cized envi­ron­ment. So will every­one in the entire coun­try be allowed to fall off the cliff? Will only the rich be pushed over? Will the defense indus­try see a sharp reduc­tion in government’s out­lays? Will the long-term unem­ployed see an end to the fed­eral government’s extended unem­ploy­ment benefits?

All of these issues will likely remain unknown until after the elec­tion and even then a sat­is­fy­ing res­o­lu­tion is uncer­tain. No small mat­ter, since the Con­gres­sional Bud­get Office esti­mates that if the fis­cal cliff remains in place and all of the auto­matic adjust­ments occur, the U.S. would likely enter a reces­sion at the begin­ning of next year since the total value of the growth-killing mea­sures amount to 3.5–4.0 per­cent of GDP.

One other known-unknown is any poten­tial mil­i­tary oper­a­tions under­taken by Israel against Iran as the lat­ter con­tin­ues its desire to move into the group of nations with nuclear weapons. At the start of this year the issue was front-and-center in oil mar­kets. It has since receded in its “known-unknown” rel­e­vance, but events could cer­tainly occur to bring it back to the fore­front and drive up world oil prices.

In all of these fac­tors, as well as the known-knowns dis­cussed last week, the impact on the U.S. eco­nomic out­look would likely be to restrain growth opportunities.

In the world of Don­ald Rums­feld, the final piece of the plan­ning puz­zle is “unknown-unknowns.” So what are these and how does one plan for them? Unknown-unknowns, by def­i­n­i­tion, are totally unex­pected and can­not be a part of any rea­son­able plan­ning process. One such unfor­tu­nate exam­ple was the tsunami of 2011 and its depress­ing impact on the Japan­ese econ­omy and the rest of the world.

So, aside from any unknown-unknowns which may occur, what do the known-knowns and known-unknowns sug­gest about the rest of 2012? Tune in next week for my best guess.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Jun 26 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.