Ten years ago I praised a book by Mervyn King, former governor of the Bank of England, on the subject of “radical uncertainty”. Back then, I agreed with King that radical uncertainty – the kind that statistical analysis can’t deal with – was a pressing issue for financial regulators. After the extraordinary year just ending, the challenge is no longer so confined.
Over the past 12 months, the US has seen every norm of economic policy – trade policy, fiscal policy, monetary policy – blithely tossed aside. At the same time, the US economy stands at the bleeding edge of what might be as consequential an economic revolution as the transition from farming to manufacturing, or from manufacturing to services – except that the AI revolution could happen much faster. I’ve been writing about economic policy for more decades than I care to remember. Never have I witnessed anything remotely like this past year’s surge of disruption.
The US economy stands at the bleeding edge of what might be as consequential an economic revolution as the transition from farming to manufacturing, or from manufacturing to services.Credit: Getty Images
Where will it lead? Everybody who claims to know is either lying or deluded. That’s the point of radical uncertainty. The models that guide expert predictions rest on data that has never encountered shifts like these – certainly not all at once. Measures of risk based on established patterns are essentially useless.
If the economy crashes next year, it will be the most over-determined collapse ever seen, with far too many causes to choose from. (Talk about abundance.) Yet far from crashing, maybe the economy is on the cusp of a productivity revolution, powerful enough to overwhelm every choice, good or bad, that President Donald Trump’s administration and its successors might make. Nobody knows. This is as radical as uncertainty gets.
Current confusion over the state of the US economy seems emblematic. In the past few days, official statistics have told us that America’s economy is powering ahead (in the third quarter, gross domestic product grew at an impressive annual rate of 4.3 per cent) even as unemployment appears to be going up (leading the Federal Reserve, concerned about a possible downturn, to cut another 25 basis points from its policy rate earlier this month).
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Perhaps AI is creating this strange conjunction – boosting growth and productivity while causing the demand for labour to cool. Yet that seems unlikely. AI is certainly capable of transforming the workplace, but it’s early days. The boom is certainly in the numbers for investment (all those data centres cost money) but the effects on jobs and productivity, for the moment, are just guesswork. The numbers would be hard to interpret even if the ones we have were to be trusted, but they aren’t. Thanks to the US government shutdown, official statistics are still in disarray.
Here’s what we do know.
First, decades of conventional wisdom on international trade have been dumped. Formerly, trade was about competition, efficiency, comparative advantage and mutual gain. Now it’s about who exploits whom. The US, dismayed by imaginary decades of technological backwardness and economic underperformance, is refusing to be held back any longer. “Reciprocal tariffs”, or something, will restore some semblance of global economic justice. Henceforth, trade won’t be purportedly “free” or “fair”. It will be managed by experts in Washington to deliver maximum advantage to the US – on pain of international sanctions, up to and including withdrawal from long-standing alliances.
