Wednesday, April 18, 2012

Getting out of getting deeper in debt

I found it interesting to connect this week's topics of (good and) bad strategies to the budgetary difficulties of various governments, such as ours here in the United States, and those in Europe, where there is much debate about the proper approach to dealing with deficits and growing debt. As recently as today, I read that "Italy's prime has abandoned his dream that Italy can balance its budget during a deepening recession." http://www.businessweek.com/articles/2012-04-18/italy-admits-it-cant-balance-the-budget-in-a-recession
Many advocate restricting government spending to balance budgets. The discussion of the situation in Italy suggests that, there, that was a bad strategy, and it bears a couple of the hallmarks described by Rumelt in his article "The perils of bad strategy."
The big problem is in failure to face the challenge. This type of failure is when the strategy is not built on an understanding of the underlying causes for unsatisfactory performance. As this article about Italy describes, the underlying problem causing the Italian government financial difficulty is the general underperformance of the economy: "Slow growth, not profligate public spending, is the No. 1 problem in Italy." Therefore, strategies which expect to change the adverse outcome without addressing the underlying cause are unlikely to succeed. In particular, strategies of cutting government spending are more likely to exacerbate this root cause, not solve the problem.
We see this same pattern of debate elsewhere in the world, with lots of disagreement over which are good or bad strategies for decreasing deficits. If the circumstances are highly uncertain and the interactions in the system highly complex, there may be no way to truly predict a priori which actions will have which effects. Is there some sort of level of uncertainty and complexity at which there is no longer any appreciable difference between the likelihood of success of 'good' strategies versus 'bad' strategies?

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