Friday, August 19, 2011

A Soaring Economy

Every trained pilot knows that pulling back on the yoke causes the nose of the aircraft to pitch upwards. Sufficient airspeed and thrust will steadily increase the climb rate and altitude. If the airspeed is insufficient the aircraft will quickly stall, nosedive, and the plane can crash. The distinction is essential. Pilots understand the primary effects, side effects, interactions, and situational use dozens of cockpit controls. They master aerodynamics in theory and in practice.

Professional pilots train for years, practice in flight simulators, refresh their skills often, demonstrate new skills to expert instructors, practice a wide variety of emergency procedures, and constantly study flight theory and operation. As a result expert pilots skillfully manage the complexities of flight and  complete tens of thousands of flights safely each day.

Boeing 747 Cockpit
Controlling an economy is at least as complex as controlling an aircraft. Corporate and individual tax rates, interest rates, spending rates, money supply, subsidies, tariffs, international trade agreements, and regulations each have their primary effects, secondary effects, interactions, and situational applicability. Do we know what these effects are? Do we know how they interact? Do we know how they work in a wide variety of situations? Do we have an accurate and comprehensive macroeconomic theory that describes the system interactions?

Knowing what control to exercise in each economic situation is a complex skill best left to trained experts. Perhaps economies would soar more often than they crash if we learned more lessons from expert pilots.

Pilots study comprehensive and accurate aerodynamic models. They understand the four primary forces of thrust, drag, lift, and gravity. They study the characteristics of their specific aircraft learning precisely how it performs under different conditions of speed, load, weather, position, and configuration.  They master new maneuvers in simulators rather than subjecting passengers to ad-hoc experiments.

Perhaps we can begin by researching, developing, validating, and understanding a comprehensive and accurate macroeconomic reference model. We could use that model to understand, describe, and explore the many effects of each proposed change in the economy. For example, the effects a proposed tax cut would have on public sector jobs, private sector jobs, the deficit, and other aspects of the economy could be described together as the overall effect of a proposed change. We would always refer to the same reference model to fully describe the many effects of each proposed alternative rather than highlighting only one effect while ignoring all the others.
US Unemployment Rate, 1890-2009
The pilot and co-pilot agree, well before takeoff, on their destination. It would be reckless for the pilot to head toward Chicago while the co-pilot is determined to head toward Iowa. Perhaps leaders could agree on the overall goals of proposed economic policy for the long term and the short term before proposing specific maneuvers. Is the goal deficit reduction or jobs growth? What tradeoffs are we willing to accept? What is the flight plan—the economic trajectory we are proposing? Is there some set of controls that can be exercised to achieve that outcome for each of the important economic elements? Can we validate our economic proposals before subjecting the citizens to yet another ad-hoc economic experiment?

When a bird strike suddenly stopped both engines on US Airways Flight 1549, Captain Sully Sullenberger drew on his extensive expertise, wisdom, leadership, and courage to calmly and expertly land the plane in the Hudson River. He did not look at a single straw poll; it was a time to rely on a lifetime of experience rather than sound bites. Everyone aboard was saved in the January 15, 2009 “Miracle on the Hudson.” Sadly this contrasts with the tragedy of Colgan Air Flight 3407 which crashed near Buffalo New York when less experienced pilots reacted incorrectly during difficult weather conditions. All aboard were killed the night of February 12, 2009 when the plane stalled and crashed due to pilot error.

Complex systems require expert oversight. We must improve the expertise, wisdom, leadership, and courage of the people controlling our economy.

Perhaps a widely available tax policy simulator—let's call it TaxApp—could help us distinguish fact from fiction. Tax App would do for our understanding of tax policy what spaghetti charts do for hurricane forecasts. Imagine an application for the iPad and other platforms that allows the user to input tax policy proposals and then displays their consequences across the broad economic landscape. For example in simulating a specific proposal to increase tax rates for the wealthy TaxApp could forecast the impact on total tax revenues, deficit over the next 20 years, the amount I pay in taxes, the amount my business pays in taxes, the ratio of taxes collected from business to that collected from individuals, the number of people paying taxes, a profile showing what people at various income levels contribute to the tax revenue, employment levels, the degree to which such a change would be more or less regressive, and other important implications.

The economic models that form the basis for TaxApp could be designed by a panel of expert economists. Just as several different meteorological models each predict a unique path for each hurricane, there might be several different versions of TaxApp, each reflecting differing expert opinions on the most accurate economic model. When a hurricane is about to reach land, we look at each path predicted by the various meteorological models and from that spaghetti chart we can immediately see where the models agree and the extent to which they disagree in their predictions of the hurricane path. Similarly, we can look where the various versions of TaxApp agree and the extent to which they disagree about the impact of various tax proposals.

Hurricane spaghetti models help us understand weather forecasts. Perhaps TaxApp could help us understand the implications of tax policy proposals.
When a hurricane is about to come on shore we study a variety of expert opinions, rendered in the form of the spaghetti chart, to understand the most likely future outcome and degree of uncertainty. With TaxApp we can get similarly important information about tax policy proposals. Imagine a presidential debate where a candidate proposes a specific tax policy change. The moderator, or any viewer, can model that with TaxApp and immediately notice the full range of impacts and implications that policy would have. Specific follow-up questions could then be posed to the candidate. Injecting this level of reality into the dialogue would move us to a new level of understanding.

Generations of aspiring pilots enjoyed testing their skills on Microsoft Flight Simulator. Perhaps a new generation of aspiring politicians, or caring citizens, can enjoy testing their skills as tax policy proponents.

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