Coronavirus economic policy uncertainty is costly and sometimes preventable
by Bruce Yandle
March 18, 2020 02:12 PM There are no readily available insurance policies that will cover all of the uncertainties we face right now, whether that’s the losses individuals or organizations may incur due to the coronavirus-driven loss of employment; plant and concert closings; on-again, off-again trade wars; Federal Reserve emergency interest rate actions; Middle East flare-ups; or the collapse of petroleum prices. The ramifications of these events are not well understood, and the dimensions of risk are unknowable.
It is valuable, though, to at least think about what exactly economic uncertainty is — because that is what we are dealing with. When facing uncertainty, we react as best as we can by taking offsetting action. We hesitate, reassess the situation, and adjust what we are doing after the fact. It helps to have a good savings account because policy (and any other uncertainty) is costly.
In his 1921 magnum opus, Risk, Uncertainty, and Profit, Frank H. Knight carefully distinguished the difference between risk and uncertainty. Risk, he said, is associated with a known distribution of outcomes that has been validated by experience or statistical studies. We can think about it like buying an insurance policy to cover the loss that might befall us if our house catches fire and burns to the ground. The insurance company cannot predict if our house will burn in a particular year, but it can predict with considerable accuracy how many houses out of a large sample will burn and how much it will have to pay when there is a loss.
We human communities have gotten pretty good at dealing with risk. But not with uncertainty.
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https://www.washingtonexaminer.com/opinion/coronavirus-economic-policy-uncertainty-is-costly-and-sometimes-preventable
