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Unknown Unknowns

Unknown Unknowns

By Thomas Sowell - July 12, 2011

When Donald Rumsfeld was Secretary of Defense, he coined some phrases about knowledge that apply far beyond military matters.

Secretary Rumsfeld pointed out that there are some things that we know that we know. He called those "known knowns." We may, for example, know how many aircraft carriers some other country has. We may also know that they have troops and tanks, without knowing how many. In Rumsfeld's phrase, that would be an "unknown known" -- a gap in our knowledge that we at least know exists.

Finally, there are things we don't even know exist, much less anything about them. These are "unknown unknowns" -- and they are the most dangerous. We had no clue, for example, when dawn broke on September 11, 2001, that somebody was going to fly two commercial airliners into the World Trade Center that day.

There are similar kinds of gaps in our knowledge in the economy. Unfortunately, our own government creates uncertainties that can paralyze the economy, especially when these uncertainties take the form of "unknown unknowns."

The short-run quick fixes that seem so attractive to so many politicians, and to many in the media, create many unknowns that make investors reluctant to invest and employers reluctant to employ. Politicians may only look as far ahead as the next election, but investors have to look ahead for as many years as it will take for their investments to start bringing in some money.

The net result is that both our financial institutions and our businesses have had record amounts of cash sitting idle while millions of people can't find jobs. Ordinarily these institutions make money by investing money and hiring workers. Why not now?

Because numerous and unpredictable government interventions create many unknowns, including "unknown unknowns."

The quick fix that got both Democrats and Republicans off the hook with a temporary bipartisan tax compromise, several months ago, leaves investors uncertain as to what the tax rate will be when any money they invest today starts bringing in a return in another two or three or ten years. It is known that there will be taxes but nobody knows what the tax rate will be then.

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Copyright 2011, Creators Syndicate Inc.

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