Policy uncertainty is a hobgoblin that challenges any economist or policymaker, anytime. But compared to President Trump's now-famously quixotic style, that ordinary hobgoblin looks like a (much preferred) wimp.
In an extraordinary November 2016 presentation at a J.P. Morgan Cazenove London Conference, Bank of England official Kristin Forbes focused on the role played by uncertainty when forecasters try to identify the future direction of the economy. To be clear, uncertainty poses a challenge to all who attempt to make tomorrow's plans. But Forbes was addressing the different choices economists must select from in order to account for uncertainty within their forecasting models. You see, there is even uncertainty about uncertainty.
Could anything be worse? Yes, actually. Certainty about a pending disaster can be worse than a state of uncertainty that might allow for better possibilities.
Consider two early developments from the new Trump administration.
First, efforts to deliver on the promised border wall paid for by Mexico brought what seemed like a brief moment of certainty to a long-running and highly contentious debate. But it was fleeting. President Trump said Mexico would pay. Mexico said, "No thank you." Welcome back, uncertainty.
The Trump administration pivoted and announced that they had discovered a new way, as they put it, to make Mexico pay after all. The United States would impose a 20 percent border tax on all exports from Mexico. And just like that, we were back to a state of certainty—at least according to the president's bold rhetoric.
Now, assume the proposal were to stick and become a complete certainty. Does Mexico actually bear the whole cost of a border tax? Not even close. The burden will fall on U.S. consumers, workers and shareholders in firms that buy Mexican-made products.
Trump's certainty was worse than uncertainty. And the effects of a second action were far more profound.
Again, in an effort to deliver on campaign promises in the midst of uncertainty, Trump introduced some temporary certainty. He signed an executive order restricting immigration from six predominantly Muslim, Middle Eastern countries, shut down immigration from Syria, and issued warnings to current American Green Card residents who are citizens of the affected countries that if they left the U.S., for any reason, they might face difficulty returning.
After chaos reigned at airports worldwide, a federal judge put a temporary hold on the order and uncertainty re-entered the equation, thanks largely to questions on just how the Green Card situation would be handled. The free movement of human beings, the ultimate resource for any society, was pushed aside.
With the stroke of a pen, the new president demolished the expectations of already-vetted individuals who had firm plans in place to make their way to the U.S., in some cases splitting families that were partly relocated. In destroying Green Card-holder mobility, the administration pointedly focused on people of the Muslim faith. There were immediate protests and an outcry from U.S. universities whose student and faculty ranks are filled with people from the affected countries.
The newfound certainty looked a lot worse than the uncertainty it replaced. In fact, it looked like a disaster.
Uncertain economic policy — not knowing what might happen or how to model it — can be a better state of the world than having certainty that spells out large targeted losses in human wellbeing. Perhaps Trump should let his executive order pen rest for a while and give reason an opportunity to season his decision-making.