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Policies of Scale: Efficient Global Policy

The Problem of (Mis)Scaling Challenges

I love the word “future” and its connotations for public policy. I cut my policy chops at The Hudson Institute, where early on in my post-undergraduate career I spent a good amount of time immersed in futurist thinking. Hudson was founded by one of the leading futurists of all-time, Herman Kahn, and it has maintained its orientation. At a recent meeting with several of Hudson’s fellows, I was reminded that it is exciting and important to think about today’s issues on a timeline that begins 5 or 10 years from now. So, I was excited when recently Paul Krugman wrote that he will be putting more attention towards long-term economic growth despite the global and all-consuming focus on short-term economic challenges since the beginning of the recession. ‘This is good,’ I thought, an international economic thought leader is scaling a challenge for the future. We all need to start thinking more about the future.

When I use the term scaling in this instance I’m referring to its “weigh a specified weight” definition, or attributing appropriate importance to the components of an issue or challenge. Properly scaling means understanding three fundamentals about the issue or challenge: (1) the varying importance of the components comprising the issue or change, (2) where it falls in the short to long-term timeline, and (3) its importance relative to other issues or challenges and thus where to prioritize it.  I will touch on all three in regards to a couple of issues facing our country as a sort of survey of how I fear we are mis-scaling the road ahead.

It can be dangerous to focus so entirely on fixing today’s problems. Professional economists will know better than I that the distinction between short-term and long-term is incredibly important in economic analysis and planning because the mechanics and policy prescriptions are unique to the term being considered, and are often counter-productive when misapplied. Since the global recession hit, the world has in varying degrees been heavily focused on the short term because that is how we get out of the recession.

If you agree with the concept, like Krugman, that national debt is more or less worry-free in the short-term, and if you agree that the federal government ought to be stimulating the economy through boosting its own action (because private demand and investment are insufficient) like Ezra Klein, than you recognize that these strategies can spur economic growth – in the short-term, a concept lost on Europe. But if you accept that more stimulus is unlikely, then you may want to consider what ought to be done to set us up for long-term growth, and that means thinking about new policies because the stimulus is a few years old and so we’ve emerged from its short-term environment.

The fiscal cliff negotiations were a reminder for me that we as a country do not do long-term scaling very well these days, if at all. The GOP has been seemingly exclusively focused on the long-term issue of deficit (and/or debt, if you recognize the distinction that many seem to not) at the cost of forcing insufficiently simulative policies, while the Democrats have been so focused on the short-term that one wonders if they have good ideas about what to do when the series of legislative crises necessitating short-term planning eventually peter out. The result of the competing foci has been mostly short-term strategies neutered by long-term considerations, a far from optimum mix.

Then there is the form of mis-scaling that turns attention away from places that need it. Say what you want about the link between humans and climate change, we know that carbon dioxide is exacerbating climate change and fossil fuel consumption produces incredible amounts of carbon dioxide. So when news broke that carbon dioxide emissions began reducing in 2008, and carbon dioxide emission projections from the EIA showed long-term low rates, those free marketers who fight climate change legislation and international agreements championed the findings and argued that the problem was largely solving itself per the functioning of the free market. Ironically, the only function the market performed in this regard was to go into recession and then recover very slowly, unevenly, and inequitably.

Naturally, the scale of this argument was off. Joseph Stiglitz has been arguing that the field of macroeconomics is facing a serious crisis because the models it had developed during the 1980s and 1990s were largely based on selective time periods that skewed the results, explaining why the economics behind the massive growth in the 1990s could not explain the recessions bookending the 2000 decade and do little to renew economic growth now. Similarly, the argument that carbon dioxide emission reduction was a product of market forces fails to explain (or acknowledge) several drivers behind the reduction, and does nothing to inform better long-term energy and environmental policy.

The long-term projections are a result of (1) significant government regulation improving vehicle efficiency (CAFÉ standards), (2) the recession, which dampened energy demand (energy is inelastic), (3) mellow long-term economic growth projections, which slows the rate of energy demand growth, and (4) an increase in the use of alternative fuels, largely from more regulation. Half of these reasons are the anti-free market mechanism of regulation (which, especially with alternative energy legislation, is distorting the market), while the other two are results from our underwhelming economy; none are actions those championing their results would advocate we continue in the future.

One reason for championing the results was to diminish interest and attention in the issue, which because of its actual scale, is likely to re-emerge as an issue as the economy improves, consumption increases, and emissions rise despite their low projections (which show annual emissions increases for the next thirty-odd years despite remaining below the pre-2008 levels that were sufficient to accelerate the climate change we’re already experiencing). Further, if we remember the scale of this issue is global, the projections for carbon emissions in large developing nations like India and China mean that our attentiveness should not fade.

Immigration is another issue that has fallen victim to inadequate scaling. Similar to energy consumption, our economic performance has a large influence on immigration. The recession has significantly reduced illegal immigration, and concurrently interest in immigration policy as an area of much-needed reform too (which may be why the President is trying to start the conversation on his terms). Unfortunately, the recession significantly reduced legal immigration at the top end of the skills spectrum as well, which is not good for the country’s long-term economic outlook. President Obama has said that immigration will be one of the policy initiatives that define his second term, but the political calculations each party will make may collapse a bipartisan solution.

For the GOP to revolutionize its immigration policy, it must face the challenge that many of the issues it needs to support to benefit from passing real immigration reform are antithetical to the core of the party: robust government programs. If the GOP does not warm up to these policies then no amount of support for immigration policy will swing sufficient votes, and that will be the calculation dictating many GOP lawmakers’ decisions.

The coherence and logic of our future immigration reforms will, similar to the logic that dictated the fiscal cliff bill would address entitlement viability by raising more revenue for the strongest of the entitlement programs while ignoring their biggest cost driver (rampant health care costs), fall prey to calculations having little relevance the problem at hand. Will Congress and the White House consider a cost-benefit analysis of more border security? Will they look at the incentives of illegal versus legal immigration? Will they consider the economic costs and benefits of greater visa  allocation for skilled and educated immigrants? Will they look past the short-term slow economy to realize that with renewed economic growth comes a renewed incentive to immigrate to the US, legal or otherwise? And will they look at these questions with a long-term scope while weighing the importance of individual components? Perhaps to some extent, but their short-term interests will be scoped to individual and party electability and act within that framework, and that will shift the debate away from the merits of the policies themselves.

I am struck by today’s negativity about the future, usually framed either as if the last five years of economic struggles are because (1) we tried to grow from the center (government) out, or (2) we grew too little from the top (the top-2%) down. Either way, the image we have of ourselves as a country is quite negative. Herman Kahn wrote in Next 200 Years with William Brown and Leon Martel that “a negative [image], if persuasive and realistic, might help elites to mobilize to face real problems (as opposed to unrealistic negative images, which tend to raise false issues, create unnecessary controversy, and divert resources and attention from practical solutions).” So which kind of negative image do we have – realistic or unrealistic?

By failing to properly scope our issues and challenges we end up with fiscal cliff half-measures with solutions for only minor problems, views on climate change that distort fundamental economic concepts and energy and environmental realities, and an immigration debate tainted by election math. These outcomes fall well short of what is needed to adequately address their corresponding challenges, and even if the American public is not confident about what better solutions look like, they know these are not them, and remain quite pessimistic – negative – about where the country is heading. Take your pick:  both liberal and conservative polls demonstrate this. The way we scope issues needs to change.

I will end with an issue for us to watch that could be debated shortly in Congress: the minimum wage. Democrat Senator Tom Harkin from Iowa wants to raise it over the next two years from $7.25 to $9.80 to reduce income inequality and stimulate the economy. Evan Soltas dissects the pros and cons of the idea here and suggests that despite its ability to do both, modestly, the better strategy would be to raise the earned income tax credit (EITC) because it costs less, better targets those in need, and serves the economy better in the long-term. I agree. However, the likely result is that the GOP will block the effort because, incidentally incorrectly, they believe it will kill jobs.

As Soltas suggests, the GOP ought to instead counter Harkin with an EITC increase. That’s properly scoping the issue: income inequality is incredibly high and a problem worth addressing, raising the minimum wage has limited abilities to effect it while the ETIC has a better chance, and both stimulate the economy (the minimum wage has more significant short-term effect while the ETIC tends to be more significant long-term by helping people better manage their incomes). I hope to see the debate take shape constructively around the goals of improving income inequality and stimulating growth, and I hope to see our country do a better job of scoping our challenges through greater rationality and force of intellect.

9 Responses to “The Problem of (Mis)Scaling Challenges”

EEBJanuary 9th, 2013 at 5:03 am

This notion that you never have to raise the minimum wage; just expand the EITC, is ludicrous! For as time goes on, if inflation remains positive, then the real value of the minimum wage must approach zero. If the real value of the mimimum wage tends toward zero, then the real value of the EITC must, as a matter of logic, also tend toward zero. But this state of affairs violates the Second Law of Thermodynamics!!! Ergo, Evan Soltas needs to go back to the drawing board!!!

Frank YouellJanuary 10th, 2013 at 12:10 am

It's almost bizarre to see a discussion of long-term economic issues that doesn't bluntly admit that mass immigration is vast net negative. Mass immigration is reducing (rather quickly) the skill level of the American people and making future resource scarcities much harder to deal with. The immigrants that the United States are less educated than the natives and (far worse), their children, grandchildren, and great-grandchildren will perform dismally as well.

Their's no majic to this. Poor people are a vast net burden in a welfare state. America (like it or not) is a vast welfare state. Low-skill immigrants may work cheap. However, their welfare costs dwarf their meager earnings, much less the even smaller taxes they pay. Of course, they also drive natives out of the work force (on a vast scale). The natives then end up on handouts of one form or another.

Even if none of the above was true, low-skill immigrants are a disaster. We don't need to reduce education levels in the United States. We don't need more high-school dropouts. We don't need more "graduates" with bottom of the barrel reading, math, and science skills.

Even if the immigrants entering the United States were highly skilled, they would still be a long-term burden. Why? The author clearly recognizes that America faces a resource constrained future. We are running out of many things (oil, water, arable land, etc.) not the least of which is the ability of the atmosphere to handle greenhouse gases.

In a resource limited nation, each immigrant means less for each American. That's the cruel truth, like it or not. A sane nation doesn't add more passengers to a very full lifeboat. The time has come to end mass immigration and perhaps all immigration. Imported poor people are a disaster from day one. All immigrants impose costs on a resource limited nation.

Any discussion of long-term economic thinking must either recognize these facts or just admit that "long-term" is just PC nonsense.

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Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond).

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