Tuesday, April 28, 2009


Uncertainty. It’s pretty much the only thing about which we really can be certain, aside from the obvious old observations about death and taxes. The Great Recession which has emerged from the cataclysm of the Global Financial Crisis is a monumental reminder that forecasting the future is by its very nature unreliable. Of course, there are ways to improve the accuracy of forecasting, such as by the careful study of past events, current trends, and all the variable factors that we might be able to imagine. Cause and effect are concepts that are instinctively understood, and we are tempted to believe that if we understand all the causes we can predict the effect. When it comes to economics, those who can boast a better strike rate than others in their predictions develop a reputation for prescience and can increase their consultancy fees accordingly.

But “cause and effect” is a concept from Newtonian physics, while economics, often considered to be more dark art than science, might be seen to have qualities more closely related to quantum physics. In quantum physics, reality becomes more bizarre than fantasy, and it turns out that uncertainty is inherently built into physical existence in such a way as to make it utterly impossible to make certain fundamental predictions at the sub atomic level. The so called real world that we perceive works because it represents an aggregate of all the quantum probabilities that underpin it. Because of this, one of the fundamental concepts of quantum theory is that merely observing a phenomenon changes it. This same principle applies to both politics and economics.

Treasurer Wayne Swan has been telling us for some time now that the economic downturn is worse than expected. With each new announcement, forecasts are revised to become more gloomy than before. And it’s not just the government. The O.E.C.D., the I.M.F., and now Access Economics have all warned that the situation is worse than previously thought, the recession will last longer, the eventual recovery will be more subdued, and that unemployment will become worse than expected. None of this is doing much to help restore confidence. But now, it seems the Treasurer is changing his tune.

It has been reported (by The Australian) that the Treasurer has advised his State Government counterparts that the Federal Government is preparing a budget based on a scenario of rapid recovery with above trend growth once the recession comes to an end, sometime towards the end of 2010. While this assessment might seem at odds with the more pessimistic forecasts elsewhere, it is consistent with recovery patterns after the downturns of the early eighties and early nineties. It is also consistent with what we could call the quantum theory of economics which requires governments to provide some cause for optimism which itself can inspire an improvement in the economy. In other words, it is part of the Government’s job to talk it up.

There is only one catch as far as Wayne Swan is concerned. While Australia remains in good shape overall, and certainly much better off than almost anywhere else, the influence of any optimism projected by our own government’s rosy outlook is unlikely to have much impact on the recovery process in the United States. Given that it is the United States from which the chill winds of recession are blowing, it is possible that Mr. Swan is being a little too optimistic. But that’s where the politics comes into play.

Uncertainty and perception are also at play in the political arena, and it is important that our government is seen to be both acting now to reduce the impact of the recession, as well as planning for a future which is both rosy and not too far distant. It is also important to realize that the projected recovery from the end of 2010 is after the next election, which means that we will go to the polls with the idea that our government has done its best to look after us through the bad times, and at the same time is about to deliver its promise of recovery… but only if we keep them in office.

It’s a good plan, but of course in politics, like economics and quantum physics, the only thing that’s certain is uncertainty.

No comments: