Ten years ago, I praised a book by Mervyn King, the former governor of the Bank of England, on the subject of “radical uncertainty.” At the time, I agreed with King that radical uncertainty—the kind that statistical analysis struggles to address—was a pressing issue for financial regulators. However, after the extraordinary year just ending, this challenge is no longer confined to financial regulators alone.
Over the past 12 months, the United States has witnessed the upheaval of every norm in economic policy—trade, fiscal, and monetary policies have all been blithely tossed aside. Simultaneously, the U.S. economy stands at the forefront of what could be as consequential an economic revolution as the transition from farming to manufacturing or from manufacturing to services. This time, however, the AI revolution could unfold much faster. Having spent decades writing about economic policy, I have never seen anything quite like the past year’s surge of disruption.
The Uncharted Waters of Radical Uncertainty
Where will this lead? Anyone claiming to know is either lying or deluded. That’s the essence of radical uncertainty. The models guiding expert predictions rely on data that has never encountered shifts of this magnitude, certainly not all at once. Established risk measures are essentially useless in this scenario.
If the economy crashes next year, it will be the most over-determined collapse ever seen, with too many causes to choose from. Yet, far from crashing, perhaps the economy is on the brink of a productivity revolution, powerful enough to overshadow every decision, good or bad, made by President Donald Trump’s administration and its successors. Nobody knows. This is as radical as uncertainty gets.
Conflicting Economic Signals
The current confusion over the state of the U.S. economy seems emblematic. In recent days, official statistics have reported that America’s economy is thriving, with the third quarter’s GDP growing at an impressive annual rate of 4.3%. Meanwhile, unemployment appears to be rising, prompting the Federal Reserve to cut another 25 basis points from its policy rate earlier this month, concerned about a potential downturn.
Perhaps AI is creating this strange conjunction—boosting growth and productivity while cooling labor demand. Yet, that seems unlikely. Although AI is capable of transforming the workplace, it’s still early days. The boom is evident in investment numbers (all those data centers cost money), but the effects on jobs and productivity remain speculative. The numbers would be challenging to interpret even if they were reliable, but they aren’t. Due to the U.S. government shutdown, official statistics are still in disarray.
The Shifting Sands of Economic Policy
Trade Policy: From Free Trade to Managed Trade
Decades of conventional wisdom on international trade have been discarded. Previously, trade was about competition, efficiency, comparative advantage, and mutual gain. Now, it’s about who exploits whom. The U.S., dismayed by perceived technological backwardness and economic underperformance, refuses to be held back any longer. “Reciprocal tariffs,” or something similar, will restore a semblance of global economic justice. Henceforth, trade won’t be purportedly “free” or “fair.” It will be managed by experts in Washington to deliver maximum advantage to the U.S., under threat of international sanctions, including withdrawal from long-standing alliances.
Fiscal Policy: The Irrelevance of Public Debt
There is no longer any such thing as fiscal policy in the traditional sense. American politicians will continue to debate taxes and government spending—about who gains and who loses when either side prevails—but public borrowing and public debt have become politically irrelevant. Neither party believes that the impact of any given policy on the budget deficit is worth mentioning.
“The US economy is at or close to full employment and growing at a good pace—yet the budget deficit is roughly 6% of GDP. Public debt stands at 100% of GDP, the highest in 60 years, and is set to keep rising.”
Not long ago, policymakers worried about fiscal room for maneuver—the government’s ability to stimulate the economy by ramping up borrowing in a downturn. The concern is not that most politicians believe “fiscal space” is unlimited, which would be troubling enough. It’s that they no longer even consider it.
Monetary Policy: A Politicized Federal Reserve
Monetary policy as we know it is also under threat. The conventional wisdom—until recently, as secure as the ideas that free trade is beneficial and fiscal responsibility is essential—held that central-bank independence has worked. Monetary policy acts with a lag, and politicians are preoccupied with the short term, so a politically directed central bank introduces a bias towards higher inflation: it will choose the more popular course (lower interest rates) even though it knows that the delayed, therefore politically irrelevant, result will be higher prices.
The Trump administration has already moved to politicize the Federal Reserve—placing a White House official on its policymaking committee, attempting to remove another governor by bringing accusations of mortgage fraud, and criticizing its leadership at every opportunity. Chair Jerome Powell is due to step down in May, and the president will soon name a successor, expected to be a political follower. Treasury Secretary Scott Bessent recently suggested that once inflation returns to 2%, the Fed should review its inflation target, perhaps adopting a range like 1.5% to 2.5% or 1% to 3%.
“Bessent’s objection to the current target is that ‘decimal-point certainty is just absurd’. Yet, the Fed doesn’t see itself as bound by such precision. Inflation has exceeded the 2% target for five years, with no expectation of returning until 2028.”
The risk is that the ceiling of any range would effectively become the new target—2.5% or 3%, not 2%. This perception, combined with a less independent Fed, could plausibly cause expected and actual inflation to rise.
The Resilience of the U.S. Economy
The U.S. economy is an amazingly resilient entity. In the coming months, it will need to be. Perhaps it can navigate the shattering of the consensus on trade, fiscal, and monetary policy that served it well for decades. Perhaps the new norms will prove beneficial after all, or the old ones will be resurrected post-Trump. Given the advent of AI, maybe none of this matters, and the economy will continue to strengthen regardless. Investors are heavily betting on a promised golden age, without a clear understanding of what it entails.
The future of economic policy amidst radical uncertainty remains an open question. As we move forward, the world will be watching closely to see how these unprecedented changes unfold and what they mean for the global economy.
