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.