Are We in a Pandemic or Las Vegas?
In 1921, Frank Knight defined the difference between risk and uncertainty. Put succinctly, risk can be measured – a standard deviation above the mean indicates a greater risk – while uncertainty cannot be measured. As will be seen below, the standard deviation of the forecasts for GDP in 2020 (Focus survey) is now at the highest level in history, much greater than during the global crisis of 2008. Is this an indication of risk? Perhaps! But since the modern world has never experienced a pandemic with the characteristics of Covid-19, we are all in uncharted territory, where the empty space left by lack of knowledge is filled with hypotheses that can be subjectively judged as plausible, but whose probability of occurring is very low or also unknown. The situation could have been different, if the Brazilian government had not followed the populism of Donald Trump, denying the pandemic, and instead had reacted like the governments in Asia and Europe. In Europe, for example, the spending on the pandemic was largely earmarked for income transfers to the poorest people who were out of work, which due to the efficacy in combating the pandemic did not last long. The Brazilian government is spending without attacking the pandemic, a policy that greatly increases the likelihood that the deficits will be greater and more persistent. Out of respect for Frank Knight, we have decided not to visit Las Vegas. Instead, we feel duty-bound to warn that the unknown is greater than the pressure to hazard a number. Once again, we prefer to analyze the latest data, placing emphasis on the gravity of the problem and suggesting caution in the analyses.
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