Complex Problems Do Not Have Simple Solutions
November 13, 2022
I am not going to miss the commercials depicting the people who are ultimately chosen to lead us as either saintly or the devil incarnate.
If you are prone to believe either of those extremes, you may have some challenges not turning me into one of those two caricatures as I try to explain some of the most controversial political subjects in basic economic terms.
Let’s start with taxes. Taxes are decisions around three things: who pays, how much and for what.
Taxes are fair and unfair. I receive some services for which I pay, receive others for which I don’t pay and pay for a variety that I don’t use. People who don’t like to pay taxes are not necessarily selfish and people who receive more benefits than they pay for are not necessarily freeloaders.
If there are some services for which I am paying that I think are poorly managed or should not be provided, I will have complaints about the tax system. But we often hold others to a higher standard than we hold ourselves.
There is no correct amount of taxes: If taxes were 100% of income, people would have no incentive to work; if taxes were zero, there would have to be some calculation on how to pay for things we currently take for granted. Eliminating character assassinations can lead to a richer discussion on who pays, how much and for what.
How about inflation? Inflation is a global issue and hits all of us. It makes us feel cheated and mistrustful.
Inflation represents too much money (or spending) chasing too few goods. Too much money is not a good thing because there has to be an equilibrium level where there is enough money to buy the things we need but not so much as to bid them up to uncomfortable levels.
If there is not enough of what we need, then we have to pay more for it. Inflation is generally a demand problem. If I sold parkas in Death Valley, Calif., it wouldn’t matter what I charge because no one living there would want one.
If something is not a necessity and is more expensive than I can afford, I will either deny myself or substitute something else.
When the right criticizes inflation, they may complain about the stimulus being too much. When the left criticizes it, they may complain about taxes being too low. But there are more aspects than just these two things at work.
Complex problems do not have simple solutions. Any single fix will cause new problems. When the Federal Reserve board raises interest rates, it is doing so to try to depress demand in just a few areas, hoping that it will spread to others.
It is making a decision that trying to solve at least problem A is more important than problem B, C, D or ZZZZ. Disagree with their methods if you truly understand them, but not their motives.
How about debt? When you are investing in something, debt is often a good thing. You may borrow for your education because you are investing in your future. You may borrow for your home because you are making an investment in where you live. Debt becomes a problem when you are using it for general lifestyle. Government debt is not dissimilar.
Deficits are not good or bad. It depends how they were created and for what purpose. The biggest issue with debt is that you have to some day pay it back. This is where inflation can help.
We borrow with today’s dollars and pay back with tomorrow’s. Inflation discounts our future dollars, making payback cheaper. But interest rates and inflation can be tethered. As our cost of borrowing goes up, servicing debt becomes more expensive and either crowds out other spending or causes us to need to raise taxes to meet those payments. We are back to who pays, how much and for what.
The challenge with economics is that we live in a complex, adaptive system. Squeezing one part of the balloon shifts the air to another. This means economic models can produce wildly different outcomes.
The political ads would have you believe that these economic concerns were caused by one candidate and easily fixed by the other. They aren’t. Take a breather from politics and personalities and recognize that economic choices are always about more good than bad rather than right or wrong.
– Ross Levin
This article originally appeared in the Minneapolis Star Tribune on November 13, 2022