Jared Bernstein: We can't manage uncertainty and risk without a functioning government
Summary: Surely, this is one of the primary lessons of the age of covid-19. We need a federal government that creates less, not more, uncertainty. We're a strong, resilient people, and we're realistic enough to know that the future is always uncertain. We're thus perfectly willing to do our part to get through the bad times.
To say "we live in times of great uncertainty" is trivially true and non-trivially annoying. Life is always uncertain; saying it's more so now, though true, doesn't help. Unless, that is, at least some of the causes of the uncertainty we're going through can be uniquely identified. If so, then perhaps we can do something to minimize the consequences of all this uncertainty.
Start with the underlying problem. While forward-looking thinkers argued that a global pandemic was inevitable, it took most of us by surprise. Now, in the age of covid-19, the extent of uncertainty feels particularly overwhelming. Will schools open, and if they do, should we risk sending our children? When will there be a vaccine? Was that a random sneeze or the virus?
And, of course, our current uncertainties go far beyond the pandemic. Is the economy going to get better or worse? If worse, as all the signs suggest, will Congress stop squabbling long enough to provide essential relief? If it doesn't, what's going to happen to people who can't pay rent? Will President Donald Trump win again, and if he doesn't, will he be able to steal the election? Why are there unidentified federal agents throwing protesters in unmarked vans?!
John Maynard Keynes was among the first prominent economists to put uncertainty at the heart of his economic model, and even a casual glance at today's economy reveals that this is exactly where it belongs. Keynes differentiates uncertainty from risk by noting that with risk, we can often form some degree of probabilistic knowledge about outcomes. Insurers, for example, can use history to make actuarial tables quantifying the risks inherent in aging, driving, building on a flood plain and so on.
But then there are the things for which we can't form reasoned expectations. As Keynes himself wrote in 1937:
"By 'uncertain' knowledge . . . I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty . . . The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence . . . About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know."
We can expand this definition to link allegedly measurable risk and unmeasurable uncertainty in a way that's consistent with Keynes. What might be even worse than uncertainty in terms of unsettling our psychology and behavior about the future is thinking we can accurately measure risk when we really can't.
Disastrous examples abound. Investors thought they understood the risks of complex derivatives, but, in fact, they systemically underestimated them, leading to the bursting of the housing bubble and the last recession. Economists think they can accurately estimate the lowest unemployment rate consistent with stable inflation, but they pitch it too high, meaning millions of people, disproportionately persons of color, are underemployed for years. Environmental degradation leads to 100-year floods every year.
Mark Twain had it half-right when he said, "What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so."
Turns out, what we don't know also gets us into all sorts of trouble. Which is why we need a functional federal government.
The private market can provide insurance against risk, at least for those who can afford such protections. But it cannot effectively insure against uncertainty, and it can systemically underestimate risk, at great cost to innocent bystanders (e.g., the millions who lost their jobs when Wall Street tanked the economy in 2008).
Today, some degree of the uncertainty generated by the virus — both public health and economic — could be significantly offset by government interventions. In virtually every other advanced economy, political and financial leaders worked in tandem with health authorities to establish protocols to diminish the spread, allowing for safer reopenings. While this part of the crisis gets underway, the federal government can wield fiscal policy to build an economic bridge to help people get to the other side.
In fact, Congress initially provided strong and fast fiscal relief. But now, even as the virus has sharply accelerated, Congress is dithering and delaying even as crucial lifeline benefits expire.
That is, our political system is creating new uncertainties on top of the old ones. The first failure — Trump's failure to oversee effective virus control — is exacerbated by the second failure, the collapse of economic relief for the resulting problems. The keyword, in case you missed it, is "failure."
Reducing the negative impacts when unforeseen events occur is an essential function of government, as unchecked uncertainty not only leads to present suffering, but it undercuts the future. In the moment, furloughed employees must worry about transitioning to permanent unemployment. Working parents are fraught with uncertainty about child care. Businesses are going bust as their revenues dry up, with no clear end in sight. State and local governments face their worst budget shortfalls in decades.
Entities faced with such uncertainty will not invest in the future. They will hunker down, save instead of spend (a problem that Keynes argued was a rationale for government spending in recessions), forgo investments in everything from new factories to fixing the porch. It is through precisely this channel that uncertainty feeds on itself while expanding the downturn.
Surely, this is one of the primary lessons of the age of covid-19. We need a federal government that creates less, not more, uncertainty. We're a strong, resilient people, and we're realistic enough to know that the future is always uncertain. We're thus perfectly willing to do our part to get through the bad times.
But we need a true partner in government, one that has got our back, that makes every effort to make those bad times better, not worse. That seems so obvious, but it has been eluding us for a long time. We deserve better — and it will soon be up to us to make it so.
Jared Bernstein, chief economist to former vice president Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities.