Uncertainty Can Be Good

Monday, April 29, 2013

Writing for The Wall Street Journal, Bill McNabb discusses what he calls the "uncertainty tax". This sounds like a good phrase at first, and I think it names an under-appreciated evil of central planning. However, I think the people studying the problem are already in the process of suggesting a cure worse than the illness.

What is the "uncertainty tax", as McNabb and his colleagues understand it?

Today, there is uncertainty about regulatory policy, uncertainty about monetary policy, uncertainty about foreign policy and, most significantly, uncertainty about U.S. fiscal policy and the national debt. Until a sensible plan is created to address the debt, America will not fulfill its economic potential.
That makes sense. The article later claims that "since 2011 the rise in overall policy uncertainty has created a $261 billion cumulative drag on the economy". That's quite a bit, but McNabb attributes the problem to "ineffciency", presumably related to our central planners not spitting out new plans fast enough. But is this really the right way to look at this problem? I don't think so.

Let's look at a quick and dirty example. You live on a frontier beset with bandits. Spring is nearing and you want to plan your activities for the next year. There are things you'd feel more confident about doing without the uncertainty of possibly being robbed or attacked hanging over your head. All things being equal, you may or may not be raided. You decide to make a decision since you want to be able to plan further into the future: Are you better off surrendering to the bandits -- or accepting a different kind of the uncertainty, that of joining an effort to defeat the bandits? Your decision to surrender could be made and executed quickly, but the "tax" extracted by the bandits would be far worse than any losses you suffered by planning with the sole aim of eliminating "uncertainty".

So it is that I view the uncertainty tax, when remembering the greater context of central planning in the guise of government economic regulations, which alone cost the economy $1.75 trillion --  every year. So the "uncertainty tax" is really on top of this far higher figure. Given its nature as a symptom of not knowing what the regulations (when they even can be understood and followed) will be, I'd happily take an even higher "uncertainty tax" if it meant that this nation were finally having a serious debate about the propriety of the government running every aspect of our lives and the economy.

Unfortunately, this conception of an uncertainty tax suffers from the problem of conflating fear of increasing government interference with merely not knowing how much meddling there will be. The temptation is to streamline regulatory and policy decision-making and implementation, but that temptation can easily lead to it becoming too easy for bad decisions to become policy that is much more expensive than any mere uncertainty can be.

-- CAV


4-30-13: Corrected typos. 

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