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When the balancing act rocks the boat

January 30, 2010

When every solution seems to have big negatives it’s a sign that the system is out of whack, we need to look at the bigger, long term picture and think systemically.

Last week Treasury Secretary Tim Geithner told angry Congressman Committee that in deciding to bailout AIG, policy makers faced a “tragic choice” – do nothing or allow the entire financial system to collapse. Geithner, however, acknowledged that the bailout “sets the stage and sows the seeds of a future crisis.”

When President Obama recently said he reduce the deficit by cutting hundreds of billions from federal programs to cut the deficit, Republicans were quick to label the announcement as “too little too late.” On the other Democrats argued that cutbacks would thwart efforts to stimulate jobs and economic growth.

When EPA Administrator Lisa Jackson announced that the Agency would regulate carbon emissions to battle global warming environmentalists cheered while the fossil fuel industry and energy state Democrat and Republican members of Congress warned that the move would hurt the already battered economy and cause further job losses.
In all three cases, predicting the outcome of a policy initiative is difficult. That’s typical of complex systems where “systemic instability reins” and where a push or jolt in any direction can have unforeseen results that extend into the realms of economics, politics, the environment and national security. Such systems lack resilience – the ability to absorb and recover from shocks and to adapt to changes.   One way to look at this is to imagine yourself in a canoe and one of your companions jumps up excitedly because he feels a bite on his line. The canoe starts to tip and you shift your weight to compensate; the canoe starts to rock and then a gust of wind reinforces your action and ……!!!  Canoes are not so stable. People have known this for a long time. Well before the tech age they have come up some very effective solutions. One is pictured below.

So the question is how to build resilience into systems so that the boat doesn’t sink when “things happen.” Here is one example; Denmark has a big safety net; if you lose your job you get unemployment for four years (not months, years). So if you lose your job, you don’t lose your house. It’s not such a big deal. But other policies allow employers to fire workers with fewer restrictions; this allows companies to cut back readily during a downturn, but to higher back from a qualified pool of workers when business picks up. These two policies together work like the outrigger and contribute to the resilience of the system. Perhaps this “outrigger” has helped the country weather the global storm better than most. Forbes Magazine recently labeled the Denmark as the Number One Best Country for Business.(March 18, 2009).

According to Forbes, “Because of high GDP per capita, welfare benefits, a low Gini index, and political stability, the Danish living standards are among the highest in the world.”

The Danish mixed (welfare state + capitalism) is based on much higher tax rates. Currently raising taxes and so-called “entitlements” in the U.S. would be difficult. However, if we continue to see recession and high or higher unemployment rates the currents may shift.

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