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Common Sense and Complexity

Common Sense and Complexity

    Sequestration refers to the automatic spending cuts that the government of the United States passed into law in 2011, and which went into effect March 1st of this year.  The original idea was that the impending meat cleaver approach to the budget would force a contentious Congress to reach agreement on smarter and more targeted cuts for the good of the country. Common sense might tell you that making intelligent budget cuts would be better than reductions across the board. Most people held that view.

    But my common sense argues the opposite. I say dumb cuts are every bit as good as intelligent cuts, at least for cuts of the size we are discussing. I’ll explain.

    For starters, consider how often common sense is wrong. My most-used example is that common sense tells you that investing in individual superstar stocks would give you a better return than buying the market average. But we know from studies that buying individual stocks is a sucker’s game unless you have insider or special knowledge. Common sense often steers you toward calamity.

    The thing we call common sense is in reality some mixture of bias, fear, self-interest, ignorance, misjudgment, emotion, and about a dozen other psychological malfunctions. Common sense only operates well in simple situations, and the budget of the United States is far from simple.

    When the sequestration was originally contemplated, the hope was that by 2012 Congress could get past partisan politics and agree on intelligent, common sense cuts. The flaw in that plan is that intelligence and common sense aren’t real things when it comes to the budget. If you fired everyone in Congress today and replaced them with new folks, you would end up right back where we are. In the context of massive complexity, common sense and intelligence are nothing more than the soothing sensations our brains provide so we’ll feel less frustrated and confused. Our tiny brains prefer simple statements such as:

    Cut that defense budget!

    Stop giving those freeloaders my money!

    Yay for solar power!

    I have a bit of insight about across-the-board budget cuts because I was a budget manager for a bank and then a phone company during a portion of my corporate career. My job was to present management with enough information for them to make “intelligent” budget decisions. Management would look at my information, assume it was nothing but a compilation of lies from department heads, and proclaim a 10% budget cut across all departments.

    And oh how the department heads squawked about the irrational budget process. But they made the cuts, after much complaining, and life went on. As the budget guy, I got to see how many doom and gloom stories transpired because of the “dumb” cuts. Answer: none. I never saw a real business problem that could be traced back to the budget cuts. People simply adapted to the new constraints.

    I would go so far as to say that sometimes the best way to improve a department function is to cut its budget. Constraints generate creativity. People will only try hard to improve if it is necessary. A fully-funded budget removes that creative energy.

    Consider this highly simplified example. Let’s say a government-funded medical procedure costs $1,000 per patient, but the budget cuts make it impossible to spend that much for the coming year. Once the constraints are in place, you might see more effort in searching for cheaper solutions across the globe. Before the cuts, there was no reason to even look for a cheaper solution. Now folks might do research and discover that India has a procedure that costs $100 and produces the same result. Or you might do a study that results in a better understanding of which patients will respond to the treatment, so you can skip the people who wouldn’t have been helped. For the best results in the long term, you need a healthy balance of both funding and constraints.

    The best way to ruin a good program is to overfund it until everyone involved gets fat and lazy. One could argue that the best way to improve a program – once it has reached a massive national scale – is to cut its budget and force some creative energy into the system.

    So while most of the country was worrying that the dumb budget cuts of the sequestration would lead to doom, I was thinking it was a brilliant work-around to a failed Congress. The dumb budget cuts would be no worse than intelligent cuts, and we’d gain some degree of predictability about the fiscal future. The economy loves predictability.

    This is another situation in which the Adams Law of Slow-Moving Disasters comes into play. The law states that any looming disaster that the general public recognizes years in advance will be solved. For example, if today the government proclaimed that Social Security would go away in the year 2040, the country would adapt. And the solution would likely have many advantages over Social Security in the long run. For example, perhaps it would trigger a massive wave of home upgrades as people add in-law apartments to their existing homes. The economy would boom, grandma would be close to the grandkids, and you could easily feed her with the money you saved by not paying Social Security every month. When she dies, you have an extra space to rent.

    Don’t get too caught up in my examples. I’m just making the case that budget constraints fuel creativity. And that trade-off is sufficiently unpredictable that common sense simply can’t tell you whether to cut a particular large program or not.

    So how do you make budget decisions in the face of massive unpredictability? That’s simple: You pick the path that is cheapest. And that is roughly what the sequestration did.




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