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.
Uncertainty describes situations in which we lack knowledge about the distribution of possible outcomes. Since that knowledge is lacking, there is no insurance policy available for covering potential losses that come when the Fed, in an unannounced emergency teleconference, suddenly cuts interest rates. Or when the Trump administration, overnight, indicates that tariffs may be placed on European automobiles. Or that travel between Europe and the United States will cease.
At one time, of course, we lacked statistical evidence on burning houses, automobile accidents, and dental surgery. But the knowledge gaps have been closed. Uncertainty has been converted to risk. Indeed, human progress may be described as a passing of time where uncertainties become better understood to the point that they become risks.
But what about governing and public policy? Does the same lesson apply? In this respect, we can look at governing progress as enabling greater transparency and predictability regarding policy actions. Open government, due process, and constitutional limits help with this. When political uncertainty is converted to risk, costs fall, wealth improves, and GDP growth becomes more stable.
On the other hand, encounters with high policy uncertainty can lead to recessions and financial market losses when investors put themselves on the sidelines and reassess the future and how they might position themselves advantageously.
We can observe the current situation by looking at the below plot of daily data from the Economic Policy Uncertainty Index, a measurement based on how frequently a specified set of uncertainty related words appear in a large sample of daily newspapers. The data here cover January 1, 2019, through last Wednesday.

A quick glance reveals two uncertainty spikes. The first is on August 24, 2019, when President Trump announced that all firms with Chinese production facilities should prepare to bring their operations to America. Apparently, that abrupt announcement caused lots of business decision-makers severe heartburn while trying to figure out what they would do. In time, Trump moved to other topics and people relaxed.
The second major spike occurred on March 10 and 11. March 10 was when Italy announced a nationwide lockdown due to the coronavirus. The day after that was when Trump closed travel from Europe to the U.S. Since Thursday, American travelers to Europe have been embroiled in trying to figure when and how they will return home. And business travelers must determine what will happen when the primary purpose of their travel changes from working with European colleagues to finding a way to get back home.
In short, they are made poorer by a policy action they did not expect. Obviously, we hope that the cost will be more than offset by the benefit of reducing coronavirus exposures.
There have been times when political leaders unnecessarily leveraged uncertainty for a strategic advantage. Remember former Obama chief of staff Rahm Emanuel’s rule: Never let a serious crisis go to waste. Of course, we shouldn’t assume that these political tendencies are always the case. There’s nothing easy about dealing with rapidly changing or unprecedented situations.
Right now, economic policy uncertainty is the reality. We should acknowledge that fact but limit it to the extent that we are able.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science. He developed the “Bootleggers and Baptists” political model.