An Unusually Uncertain Economy

Economists sometimes admit that the economy has different phases.  I think that they are now up to three:  Boom, Bust and Normal.

Most of the Economics literature of the past 30 years relates solely to the Normal environment.

There may be economics literature relating to the Boom phase, but who would know.  No one ever listens to an economist during a boom.

Keynes provided the theories for the Bust phase.  His ideas had been discredited up until they were needed again.  Now many economists are again looking at the Bust phase.

But on July 22, Bernanke said that the recovery was “unusually uncertain”.

There just do not seem to be any economic theories about this “uncertain” environment.  Perhaps that is why no one seems to know what to do.  They have prescriptions that would work if the environment was still in a Bust.  So maybe a double dip recession is needed to take the economy back into a phase where there are economic theories.

What economics needs is a theory of the Uncertain Environment. There are definitely theories in the minds of consumers and business leaders.  Here is one:

In the face of massive uncertainty, hedging your bets and keeping your options open is almost always the right strategy.

Jim Manzi

And that is mostly what we see businesses and individuals doing right now.  Keeping their options open.  Hence the massive buildup of corporate cash and the paydown of individual debt.

I do not have a full economic theory for the Uncertain times, but I can suggest that economists need to start treating this as a true phase of the economy and developing a theory.

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