Wednesday, August 17, 2011

The Economy as a Systems Problem

Many years ago, shortly after the earth's crust cooled and single-cell organisms developed, I took my first stab at earning a Master's degree by enrolling in the University of Southern California's MS in Systems Management program at Barksdale Air Force Base, where I was then stationed. I ended up not completing the program for many reasons (not the least of which was that I was a bit dim), but it did have a lasting impact on me: it made me think of problems in terms of systems.

The Readers' Digest version of the systems management concept is that problems don't exist in isolation, but as part of a larger environment which can be affected in unexpected ways by your attempts to solve the original problem. Sort of a leg-bone's-connected-to-the-hip-bone approach or, to use one of my favorite analogies, the squeeze-the-balloon effect - when you squeeze an inflated balloon, it will compensate for the pressure you put in one place by bulging out in other places.

This is why I am so irritated by the ineptitude of Congress's attempts to "fix" the economy: nobody is looking at it as a system, with interconnected parts that affect each other. The problem isn't debt ceiling, unemployment, trade imbalances, an asinine tax structure, rigid politics that put party line purity over common sense, or any other single issue (no matter what the wingnuts of the far right and far left would have you believe) - it's all of them taken together, and the impacts they have on each other.

What this means, of course, is that no single solution will fix the economy, because all the problems are interconnected. Here are a few examples of what I mean:

- Businesses aren't hiring because nobody has the money to buy their goods and services.

- People don't have money to buy goods and services because they don't have jobs.

- People demand lower prices on goods and services to compensate for their lack of income.

- Businesses reduce prices and maintain profit levels by laying off expensive domestic workers and outsourcing jobs to overseas locations where labor is cheap (and they don't have to worry about all those job-killing regulations).

- As people lose jobs, the government loses the income it would otherwise get by taxing their earnings. Because of a political reluctance to discuss taxes, and in order to continue operating and keep up the expected level of services, the government resorts to borrowing money, resulting in ever-increasing levels of debt which must be paid by ... surprise! ... more borrowing.

It's all a system, and all the parts are connected.

But having said all of the above, it seems to me that there are three things that will do more to help solve the interconnected problems than almost anything else:

1. Get people back to work. People with jobs have money to spend and invest. They drive the economy. In large measure, this will require businesses to take some risks by absorbing the cost of new workers in expectation of future profits. But if people don't have jobs, they don't have income. And if they don't have income, they can't spend. Get 'em back to work.

2. Throw out the entire current tax code and start over from scratch. Tax all income received from any source, and eliminate all deductions, advantages, credits, and other politically-motivated tax code gifts to individuals and businesses that reduce tax income for the government. This will probably allow a great reduction in the tax rate because lower rates applied to a larger base will generate the same - or more - income.

3. Get serious about reducing government spending. Easier said than done, I know, because every government spending program has its own constituency, and because programs that benefit Real People generally don't have vast armies of well-financed lawyers and lobbyists to protect them. But we've got to have less spending today to control future debt, as well as more income today to pay off the debt we've already accumulated. The idea of a balanced approach may be anathema to the hysterical right, but we're not going to get the problems solved just by slashing programs willy-nilly. No matter how much spending you cut now, you still need to be able to pay off the debt that's already been accumulated.

Because it's all a system.

Get people back to work. Fix the tax code. Control spending.

But don't hold your breath on any of them, because it's easier to shout about individual issues, and systems are ... well ... complicated.

Have a good day. More thoughts tomorrow.



Amanda said...

I like that second point about resetting the tax system - its fair for everyone in the system.

The Mistress of the Dark said...


Mike said...

If you keep talking like this the 'system' will come after you.