The U.S. economy, the world economy and, yes, the Alaska economy are perched on a knife edge. No one knows whether to expect rapid inflation, destructive deflation or continued malaise. So what should you do? What should policy makers do?
If you are managing an IRA or a 401(k), thinking about buying a new home or trying to decide whether or not to find a new job, then doing nothing might or might not be your best option. You need to come to grips with what the future holds for interest rates, corporate profits and inflation. In other words, you need to make an informed guess about the performance of the Alaska economy and the U.S. economy that goes beyond guessing whether or not a North Slope natural gas pipeline will be constructed and when.
I have one really solid bit of advice: Do not -- I repeat, do not! -- rely exclusively on experts, because the experts really do not know what is going to happen. Worse, they do not even agree on what is most likely to happen. The world economy is faced with unprecedented economic uncertainty and neither Federal Reserve Chairman Ben Bernanke nor anyone else who should know, does know. Bernanke, to his credit, admits it.
Although no one can tell you with any assurance what to do, there are some variables to think about when forming your own opinion on how to handle your own very important investment decision. (Yes, taking a new job is an investment decision.) Here is a short list, a place to start.
• What is the midterm outlook for the price of Alaska's crude oil and other exports? Answer: It depends.
• Will federal taxes be raised, lowered or left unchanged, and, if raised or lowered, by how much and for which taxpayers? Answer: Probably raised but by how much and for whom is anyone's guess.
• Will business and consumers view the tax changes as permanent or temporary? Answer: It depends.
• Will federal deficits grow or decline and by how much? Answer: Probably grow for a few years but by how much is anyone's guess.
• If federal deficits grow or decline, will business and consumers view the change or some part of it as permanent or temporary? Answer: It depends.
• If federal taxes are raised or lowered or if the federal deficit rises or falls, how will the Alaska and U.S. economies react? In particular, will business and consumers be encouraged to spend because they believe the policy will work or will they be encouraged to save because they have no faith in the policy's ability to cope? Answer: Flip a coin.
Sound complicated? Suppose we complicate it a bit further. How about the rest of the world? Will demand for U.S. exports rise, fall or stay steady? Where are the economies of China and India headed? What they do affects what we must do.
Putting stuff like this all together is always difficult but never more so than right now. There are so many important probabilities that have to be assigned (imponderables) and there is so little hard information on which to base one's judgment that even the most informed and best-educated experts are fundamentally lost.
I hate to say it because it sounds so unprofessional but many honest forecasters would tell you that if a major decision must be made in the very near future, both you and the policy makers might just as well flip a coin or roll a die. An immense professional literature with which I was once intimately familiar, but now less so, explores the mechanics of decision-making under uncertainty. The gist of that literature leads to advice pretty much of that sort. And that is the truth!
David M. Reaume is a Washington state-based Ph.D. economist who was based for many years in Juneau. His opinion column appears every month in the Anchorage Daily News.
David Reaume
Comment