“If you have difficulty dealing with uncertainty, you will have difficulty dealing with life.” – Professor Michael Dugas

This might be a year in which economists are irrelevant. Yes, a few of the deservedly, and some of the undeservedly famous might temporarily tip share prices one way or another, but during this year economists are flying blind, their models as nothing in the face of uncertainty. As Oxford university scholar Jan Eitking recently put it, perhaps a bit harshly, “Jargon-laden number crunching can dress up uncertainties in a confidence trick…”.

It is Vladimir Putin, Xi Jinping, assorted Mullahs and Houthi rebels, the response to them by the American administration, a gaggle of Western politicians, and voters in 50 countries with 60 percent of the world’s economic output that are holding elections in 2024 that will call the tune for US and global economies.

Rebels, Rockets and Retaliation

Start with the most obvious. Houthi rebels have used missiles, rockets and drones to force shipping companies to abandon the Red Sea route through which 15 per cent of global maritime trade, including a third of global container traffic, passes. Ships are diverted to a 4,000-mile, 20-day longer route around Africa’s Cape of Good Hope.

Ocean freight-rates have soared on some routes as have rates for containers and insurance premiums. Supply chains are once again under pressure, with effects that can feed inflation. Shippers are warning such as Costco, Ikea and Next to expect delays as the busiest shipping season of the year starts now, before Chinese factories shut down next month for some two weeks at Lunar New Year. Elon Musk has already been forced to halt production in Tesla’s Berlin plant for lack of parts.

Late Friday an international coalition that included Great Britain declared enough to be enough, and launched 60 strikes against 16 sites in Yemen aiming to reduce its ability to disrupt world trade and persuade it that tit-for-tat with American power puts it on a hiding to nowhere. This was followed by a second strike at radar facilities. It is reasonable to argue that the results of the American coalition’s response and its consequences are uncertain: no way of predicting whether the Mullahs will double down on their support of the Houthis, or decide that  the latest threat President Biden says he “privately delivered” to Iran is to be taken seriously. The President also announced, “I don’t think there’s any civilian casualties, that’s another reason it’s a success.” A clear invitation to Houthi rebels to locate civilians, preferably women and children, in close proximity to launch sites. At this writing the Houthis responded by firing a missile that hit the port side of a U.S.-owned ship in the Gulf of Aden; no injuries and minor damage.

A World of Known Unknowns

We are in a world in which the Yemen situation is only one of the known unknowns that will affect how America and indeed the world’s economies perform. What happens in the Middle East will depend on whether America broadens its responses to Iran’s several proxies and on the Mullah’s willingness to counter with a regional conflagration. In Ukraine it is uncertain which side’s backers decide they have done enough and return to tending to their own gardens, and whether Putin will put a lid on global food prices by allowing ships to operate freely in the Black Sea.

In Asia, the security of supply chains will depend on when Xi is prepared to mount an offensive to welcome a reluctant Taiwan into the arms of the People’s Republic. What Kim Jong Un decides to do with his nukes cannot be determined from any data base. Uncertainty, reports the NYT after a review of the literature, is seen by many as “a threat….” Perhaps that explains the sour, jittery mood in America.

Kerry Turns Climate Policy Over To Xi

In the longer run, climate policy this year will be out of the hands of economists, who played an important role in the past by attempting to measure the costs and benefits of various policies. Power to control climate change has passed to Xi Jinping. Economists can continue to refine their models and concepts, but Xi will shape climate policy to suit the needs of his military, while the US aims for zero emissions at military bases by 2050 and converts tactical vehicles to a fully electric fleet. John Kerry, recognizing the  irrelevance of US climate-policymakers, has dropped his climate role in favor of a spot on the Biden re-election team, which needs all the surrogate campaigners it can get.

None of this is to deny that the world has always been rife with risk and uncertainty, and has adapted. Xi has it in his power to slow the growth of the American economy by denying our companies access to chips or the rare earths the ouputs of which they dominate.   And once-separate uncertainties merge into one that reflects their inter-relationships: Russia owes much to China, Iran and North Korea; Ukraine to Western democracies. Local and regional uncertainties are now global in scope as well.

Risk, Uncertainty and Unclear Crystal Balls

It should be no surprise that a poll of 500 institutional investors taken by investment managers Natixis found they view “The biggest economic risk for 2024 is geopolitical bad actors who with one action can upset economic and global assumptions globally.” Those  vulnerable assumptions are the ones on which economists’ forecasts are based.

And those forecasts already differ widely: growth of over two per cent, Goldman Sachs, half that UBS; inflation tamed and interest rates lowered, inflation sticky and the Fed holds rates higher for longer; soft landing Goldman, stagflation Bank of America. As either Britain’s Punch magazine or Mark Twain first put it, “You pays your money and you takes your choice.”

Were they still with us, economists Frank Knight and John Maynard Keynes would rush to explain to these investors that they are fearing uncertainty, not risk. Risk is measurable based on past performance, uncertainty is not. In the face of uncertainty you are flying blind, without past experience on which to draw. Economists can help by trying to measure risk, the probability that something will happen. For help with the uncertainties existing in 2024, consult your favourite military or geopolitical analyst, or TV commentator.

So It’s Ceteris Paribus All Over Again

Economists have obtained one advantage from the rise of uncertainty to the center of policy. No need to be hesitant at repeated use of the all-purpose tool with which to accommodate uncertainty, the famous ceteris paribus escape hatch, “all other things being equal.” Which they never are.