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Thursday, February 24, 2011

An Impossible Job

Conventional wisdom has it that the more complex a nation’s economy, the more government oversight and regulation are needed to keep it from spinning out of control. It follows that government must grow in size and complexity along with the economy. Apparently, however, our government has become so vast and complex that it may have spun out of control itself.

Daniel Stone, in the November 13, 2010, issue of Newsweek, addresses the dilemma in his article “Hail to the Chiefs.” The essay’s subhead summarizes the problem: “The presidency has grown, and grown and grown, into the most powerful, most impossible job in the world.” Stone’s solution, as suggested by his article’s title, is to devolve presidential power either to cabinet members (oligarchy?) or to “outside agencies” (technocracy?).

Stone dismisses the notion that government or the president could simply do less. “It’s hard to imagine,” he writes, “how the office could sizably shrink, allowing the president to return to a more aloof, strategic role.”

The job’s impossibility stems from the sheer scope of government power and therefore the incredible array of issues with which any president must grapple: unemployment, Middle East peace, energy, homeland security, drug abuse, Iraq, offshore drilling and oil spills, foreign trade, terrorism, scandals, greenhouse-gas emissions, Afghanistan, North Korea, health care, the financial industry, pollution, education, transportation, nuclear proliferation, the national economy, the global economy—the list is endless. How can any one person competently deal with all that, no matter how many advisers he or she might have?

In Stone’s words, “Days in the West Wing are a constant, head-spinning oscillation between dozens of domestic, foreign-policy, and political eruptions and concerns.”

Imagine the mass of information flooding into the White House each day. Who could digest it? Some half-dozen aides are needed just to deal with incoming mail. Stone relates former chief of staff Rahm Emanuel’s instructions to senior staff members trying to deal with the daily deluge: “We need to make his memos shorter. Last night we sent the president a phone book.”

Yet a library of “phone books” would be needed to adequately cover all the issues a president attempts to handle. A country, not to mention the world, is too complex for anyone (or any group) to manage; they simply cannot gather, analyze, and act on the necessary mass of information in a timely fashion. In fact, this understates the problem: The most critical knowledge on which a society depends for its smooth operation—“knowing how” rather than “knowing that”—is widely dispersed and cannot be fully articulated. This is the “knowledge problem” emphasized by F. A. Hayek. Delegating power to cabinet members or agencies cannot solve that problem.

Consider the process by which a government policy is instituted. First, the goal must be clearly defined or the problem to be solved properly diagnosed. Next, a policy is formulated to achieve the goal or address the problem. Then a bill must make its way through Congress relatively intact. Once enacted, it has to be properly implemented and enforced. Finally, the policy’s impact must be monitored so that adjustments can be made in a timely manner. Performing any one of these steps successfully is difficult; performing all successfully is virtually impossible. And this only begins to identify the obstacles.

The chances of success decline rapidly as the complexity of the system to be controlled increases. Not only does predicting the impact of a given change become more difficult, but assessing the results also becomes harder. Did the policy really cause an observed behavior or was it the result of something else entirely? Further reducing the ability to determine cause and effect are the filters that ideology places on incoming information.

Ideological Filters

People use simplified models of the world to deal with its complexities. These models (aka paradigms, worldviews, or ideologies) provide logical frameworks for understanding cause and effect. Models also help filter out apparently unnecessary information from the flood of data we face every day, allowing us to concentrate on what we believe to be important. To the extent that our models are incorrect or only approximate reality, though, we can overlook important information that does not fit our worldview. This is known as “confirmation bias.”

Consider the CIA’s acceptance of the face the Soviet Union presented to the world during the 1970s, including its claim that its economy was enjoying an impressive 3 percent annual growth rate. President Ronald Reagan, familiar with free-market critiques of central planning, did not believe a command economy could work as well as the CIA thought. William Casey, Reagan’s CIA director, tasked agency analysts with exploring the possibility that the Soviet financial system was in fact crumbling. Specifically, Casey asked them what might be expected from a Soviet Union whose economy was shrinking.

The analysts speculated that popular discontent would rise. In response, Moscow would shift military spending to the civilian sector, perhaps by using steel to build locomotives instead of tanks. The Soviets might also purchase foreign technology to boost consumer-goods production, obtaining the necessary hard currency by increasing oil and gas sales to Europe.

Casey then asked analysts to determine whether any of these predicted signs of economic distress were in evidence. Within days, reports flowed in confirming the predictions. This data had long been available but was ignored as irrelevant given the assumption of a solid Soviet economy. (See articles by former intelligence official Herbert Meyer here and here.)

The lesson is not that models are inherently bad but that they must be periodically and critically examined to ensure they accurately mirror reality.

The Great Recession offers a more recent example of entrenched paradigms at work. There are many competing explanations for the current financial crunch: (1) an investment bubble produced by the Federal Reserve’s inflationary actions; (2) a housing bubble created by federal pressure on mortgage companies to lend to bad credit risks; (3) the federal government’s implicit backing of Freddie Mac, Fannie Mae, and other financial institutions, leading them to take excessive risks; (4) deregulation, notably the repeal of the Glass–Steagall Act; (5) unregulated derivatives trading; (6) housing speculators; (7) predatory lending; (8) Wall Street greed; and (9) tax cuts that allowed imprudent investments by wealthy individuals leading to a financial bubble.

Any of these views can be supported by citing isolated nuggets of carefully selected data. Predictably, libertarians and conservatives prefer explanations predicated on government failure. Proponents of government control favor theories rooted in market failure, while class warriors promote those blaming the rich in general and Wall Street in particular.

Theoretically, corrective policies based on each explanation could be implemented one after another. A policy’s success or failure might indicate whether the explanation on which it was based is correct. But a nation is not a laboratory, and uncertainty caused by such experimentation would bring the economy to a grinding halt. Furthermore, success or failure would not be conclusive. Opponents of a successful policy might argue that conditions improved despite, not because of, the action taken. Similarly, supporters of a failed policy could claim that things would have been far worse without it.

Rather than experimenting, policymakers might consult history to determine the results of similar past policies. Yet history is also seen through a filter. After 70 years of hindsight, economists and historians still argue whether market or governmental failure caused the Great Depression and whether the New Deal helped or hurt.

Politicians generally surround themselves with people who share their fundamental beliefs. The president’s staff controls the information he sees, and that information is likely to comport with their shared worldview. This alignment of “paradigm filters” exaggerates the importance of those bits of information that are consonant with the White House consensus and discounts those that are not. Failed programs are therefore more likely to be expanded than ended. The president and his advisers will want to believe that any problems were caused by insufficient funding or enforcement rather than an unsound worldview. Reinforcing this tendency is self-interest—admitting mistakes can shorten a politician’s career.

Increasing Efficiency, Dispersing Information

The notion that a president can oversee an economy is a fantasy. Unfortunately, although central planning has been discredited, Keynesian-style policies for maintaining employment or aggregate demand are still thought feasible—despite overwhelming contrary experience grounded in proper theory. But anything more complex than the most primitive economy simply is not amenable to such “assistance” from a central authority.

In Capital and Interest, Eugen von Böhm-Bawerk explained that economies become more efficient by employing increasingly “roundabout methods of production.” For example, a caveman could catch small animals for food with his bare hands, or he could increase his efficiency by using tools, perhaps using rocks or sticks as clubs. Hunting becomes marginally more complex, but the result is a bigger “harvest.” The caveman could raise his productivity further by crafting better tools—clubs, spears, snares, bows and arrows. It costs the caveman time and effort to construct tools and become proficient with them, but his investment is likely to be well rewarded.

The process of constructing hunting implements could itself be improved by fabricating tools such as knives and scrapers. The use of these tools is a further step removed from the process of hunting, constituting a yet more roundabout method of “producing” small game. This progression can be continued indefinitely as still other tools are created to facilitate the production of each new tool set.

Further efficiencies can be realized, as Adam Smith explained, through the division of labor. For example, while some cavemen hunt, others can concentrate on crafting snares or spears. With each improvement, either by creating new tools or further subdividing tasks, efficiency is increased, though at the cost of additional time and complexity. This process is repeated endlessly as economies advance.

In undeveloped countries, manufacturers must be relatively self-sufficient because suppliers and transportation are expensive and unreliable. This was true in the Soviet Union and in early twentieth-century America. The first U.S. automakers built their cars from the ground up. Nearly everything—nuts, bolts, springs, and engines—was made in a single factory. A company’s employees did everything from fabricating parts, to assembling them, to sweeping up afterward. As the nation’s economy and infrastructure developed, however, auto companies discovered they could make better cars at lower prices by purchasing components and services from specialized firms.

With inexpensive transportation, tools and subcomponents can now be fabricated far from final assembly points. Parts once built in one area of a plant then moved to another to be bolted onto a chassis are now transported from remote factories by ships, trains, and trucks over vast distances, often from other countries. Where once hundreds of companies helped to produce American cars, now tens of thousands from all over the globe help to produce far more vehicles of higher quality and with features unimaginable just a few decades ago.

With this explosion of companies comes an explosion of complexity. Those contributing to an end product’s manufacture may have no idea what that product is, where it will be built, or who will use it. Logistics is now key—ensuring that molded plastic parts, tires, paint, fasteners, adhesives, and countless other components from all over the world arrive at assembly lines in just the right number and at just the right time. All this complexity is managed by millions of people with local knowledge who quickly adapt to changes in everything from costs to the weather. None of this could be centrally directed by boards of bureaucrats incapable of even cataloging all the people, tasks, parts, and services involved before the list became outdated.

Managing the Unmanageable

As Hayek pointed out in his essay “The Use of Knowledge in Society,” the term “planned economy” is misleading. All economic activity is planned. The question is whether the planning is done by people on the scene with local knowledge and a stake in the outcome, or by remote bureaucrats with insufficient, outdated information and nothing to lose—bureaucrats ignorant enough to believe that people can be ordered like pieces on a chessboard and arrogant enough to try. Will planning be done by businesspeople who either replace faulty paradigms or fail, or by politicians holding fast to broken ideologies for fear of losing office?

Complex systems—from rainforests to economies—are less predictable than simpler ones. They are also harder to control because everything within them is interconnected. A tweak here or a prod there can have unintended and undesirable consequences. No one can anticipate how creative, entrepreneurial individuals will adjust their behavior to regulatory obstacles or stimulative measures. While a bad decision made at the local level can cause a manageable problem, that same decision made at the national level can create a nationwide or worldwide disaster.

The presidency has indeed grown beyond the capacity of any single individual. That is because government has ventured into areas where it has no business intruding. The answer is not to redistribute the government’s vast power but to radically reduce its power so that private individuals are free to control their own lives and property.

  • Richard Fulmer is a freelance writer from Humble, Texas, and the winner of the third annual Beth A. Hoffman Memorial Prize for Economic Writing for his article "Cavemen and Middlemen," from the April 2012 Freeman