Problem Solving and the Economy

While reading “Developing the Leader Within You” by John Maxwell, I was intrigued by the chapter dealing with problem solving. As I was going through it, it reminded me of what should be done to solve the problems with the economy and how what is now being done goes against these key principles. What stood out first for me was the first step:

IDENTIFY THE PROBLEM

John Maxwell writes:

‘Too many times we attack the symptoms, not the cause. Ordering your staff to stay at their desks until quitting time is a Band-Aid solution that does not answer the question, “Why does the staff leave early?” Your job is to identify the real issues that lie beneath the symptoms.’

This can be applied to many different areas. The first thing that came to mind when reading was this is relatable to what many are saying about the growing income inequality, and the rich needing to be taxed more. But are they really identifying the problem, or just a bad symptom of the real problem? Will the solution really fix what’s wrong? I would say the poor being poor is the problem, and if the rich being taxed more brings them down closer to the level of poverty, will they now be better off? Why do people just point to the gap and say ‘BAD’? Why don’t they ask “What is causing the gap to occur?” The taxing the rich idea is just a band-aid solution that does nothing to stop the gap from occurring in the first place. I won’t go into all the nasty effects that solution would have on the economy in general, or the poor, in particular in this post.

The second thing that comes to mind from that small sentence is the issue of unemployment. People say that there is a problem of too much unemployment, and so the government has to create jobs to fix the problem. But is unemployment the problem, or the symptom of the real problem? No one is really asking what is causing the unemployment in the first place, other than to say people aren’t spending enough. But they don’t ask why people aren’t spending enough, they just want to take more from people and spend it for them, forgetting about the root problem.

We can go on and on with examples on the deficits, stimulus, bailouts, tariffs, etc., but I think you get the idea. The next step is to define the problem beginning with asking the right questions.  I think one of the most important things to do is figure out if what you are dealing with is actually a problem. One way to do that is to ask why it’s a problem. We should keep asking why until you get to the root of the problem, to avoid the band-aid solution.

DEFINE THE PROBLEM

1 – ASK THE RIGHT QUESTIONS

When it comes to income inequality, not too many people are asking why it’s a problem, or at least not answering it properly. Although many are jealous or envious of others and just want to get something for nothing, there are some who actually believe it’s bad for the economy as whole, and are thinking of others. Some people believe it’s a problem because it makes people poorer. I can appreciate these worries because they are not taking this stance based on greed, but on principle. However, these people should be going back further with the question of why it’s a problem. If you don’t first ask why it makes people poor and fix that issue, you might be getting rid of the income gap, but not fixing the root problem which in this case is people are poor through no cause of their own.

A good question to ask here is, “if the rich were a little less well off, how will the poor be helped?” And we should also always be looking at the other side of the coin, and asking “if the rich are less well off, is it possible it might actually hurt the poor in some way, and if so how?” I can show a way in which taxing the rich can benefit the poor, and I can say this without pointing out the ways it can hurt them. I can also do the opposite. The only way to get the best solution is to ask the right questions and get answers from both sides.

When it comes to unemployment we need to ask why there is unemployment in the first place if we are to get to the right solution. I’m sure we can all agree that unemployment is bad, but if we just have the government create jobs and don’t ask what is causing the unemployment in the first place, what is to stop more people from losing their jobs? If, like the Austrian School says, that it’s due to a mix of regulations and taxes that is making it unprofitable to hire employees, will the government created jobs stop the flow of the unemployed? The Austrian School also points to a slowed down readjustment process process of inflationary bubbles, and the later effects of a governments’ attempt to stop a true market correction of such bubbles that causes unemployment. If all that is true; that the government jobs are a knee-jerk reaction to provide jobs to those who lost them, will it stop the flow of unemployment?  Or is it just a band-aid solution to stop people from being unemployed?

2 – TALK TO THE RIGHT PEOPLE

The next step in defining the problem is talk to the right people. In my opinion, this can involve talking to people on both sides of an issue. As a leader, you must always admit to the possibility of being wrong, or that there could be a better way. When it comes to economics, you have people who follow the Keynesian theory, and others that follow the Austrian School’s theory. There are other schools as well, and some followed more than these like Monetarism and supply side economics, but these are the most heatedly discussed in debates today. Too many times, people only talk to one person or look at one source and don’t hear other possibilities. If you’re not willing to admit you may be wrong, you can never get the whole story. You will be too focused on being right. Today, too many people believe in Keynesian economics, and will shoot down the Austrian theories without even looking into it properly. To them, the principle is correct as it coincides with their values and it is the way they wish it to be so the facts don’t matter.

Although I now hold the Austrian view of things, this was not always the case. I used to believe in the Keynesian principles, as that is what was taught in universities. I thought the Austrian ideas were wrong.  I had no idea what the Keynesian theory or Austrian theory was at the time, I just knew the principles I was taught. I got into a few arguments in the past, as I believed in socialism, and didn’t understand why the government didn’t just tax every Canadian $100 and clear the debt. Having actually looked into the Austrian theory, and studying it, I can now say I was wrong. I am not however, going to ignore all other views and shoot them down just because it goes against what I believe now. I was wrong once, and it’s always possible I could be wrong again. It just takes someone to prove the Austrian theory wrong, as it proved the Keynesians wrong. However, in my opinion the Austrian theory is logical enough that it could prove difficult for anyone to do so. The key here  is to keep our minds open and talk to the right people, if we are going to have a chance at coming up with the right answer. The wrong people to talk to are certainly not the Austrians. Nor are the wrong people the Keynesians, at least not when you first begin. The wrong people to talk to are those who don’t have any understanding of economics at all.

A perfect example of this would be a banker I talked to when dealing with my RRSPs (Registered Retirement Savings Plan). She was trying to tell me what good places to invest my money are. The problem here is that she had no understanding of economics. She was telling me to invest in areas that have previously been making money while ignoring the factors in the economy that said we are nearing another big crash. I asked her what she believed in when referencing economics, wanting to know if she believed in the Keynesian theory, the Austrians, or something else. Her answer was that she doesn’t follow any type of economics, but knows about investing. When investments depend on the economy, and you know nothing about the economy, you have no business giving advice on investing! This would be the perfect example of someone who is not the right person to speak with in order to solve my issue of where to put the money!

When it comes to unemployment, the right people to ask would be the job creators, or all business owners for that matter. We should be asking the people we are expecting to create jobs why they are not, or why they are not creating more. What is stopping them? If we are asking economists or government officials the question, how can we trust the answer? If they are not personally running a business, how do they know what obstacles might be in the way?

3 – GET THE HARD FACTS

This would involve getting the answers to the questions from step 1 and 2, and sorting through what is valid.

In the income inequality case, assuming it actually is a problem (see this Mises Institute article to see why it’s not), we avoid the band-aid solution by asking “What is causing it?” The answers are pretty extensive, having to ask the same question on the next answer a few times, and so I won’t go into it here in too much detail. You can go to the Mises Institute and read up on all the principles. In the end, one of the main causes is inflation. When the government or central banks print money, it gets spent at its highest value by those who get it first. These are the people in the government, their friends, the banks, and big businesses that borrow this money first in its large quantities from the banks. The people in the right positions, mostly those that are already rich, get the most value out of it. Since new money, or inflation, does not affect everything in the same way at the same time, it trickles down. The last people to get the new money are usually workers, in the form of wages. Have you ever complained that your job never gives you a big enough raise to cover the cost of living, if they give one at all? While the upper class gets to spend the money right away, that same dollar might only be worth 95, or maybe even 90 cents by the time inflation trickles down to the workers. With this being one of the real causes of the issue, we can see that while taxing the rich might make the rich poorer, it won’t stop what is causing the gap to appear in the first place.

In the case of unemployment, the Keynesians say the cause is lack of spending & consuming. They think that if more money was being spent, businesses would have more money to hire people, and that this in turn would create demand. But we are not yet at the bottom of the “why?” What is causing the loss in spending, and what is causing that? According to the Austrian School, it is not spending, but demand and production that influences the economy. Basically, you need to have money to spend it. If you don’t have any money, you will not be demanding very much. To have money, you first need to produce something of value, and then you need to save it for what you would like in exchange. Some might argue that you can use credit cards if you don’t have the money, and this is what the Keynesians seem to think. They say “Spend now so that wealth will be created from that spending”. Anyone with a credit card knows that if you owe money, you now have to pay interest on it, and so although the spending is boosted in the short term, when you have to pay interest the next month, you now have less money to spend than the previous month. If we were to have the government create jobs, is this really the solution to the problem or just a band-aid? More people have jobs, at least in the immediate time frame and these people will spend. But where does the money come from? It comes from people. If these people no longer have the money, because the government took it to spend for them via taxes, they are not spending money themselves anymore. Spending was never actually increased when you look at the big picture, over time. The fact is people need to save money in order to spend it. If we take money away from them, they have less to save and so less to spend.

There are other causes we come across when we ask what causes unemployment, or why jobs aren’t being created. The answer we often get when asking business owners this question is regulations. They often say it is too risky due to all the laws in place, or just not profitable. Some of these include the liability insurance, the extra taxes (yes, the government charges you fees to have employees), Medicare, unemployment insurance, minimum wage, etc. Regardless of whether or not you think they are needed, it doesn’t change the fact that it stops people from hiring due to profitability. In some cases there are laws stipulating you aren’t allowed to hire more people, and in some cases it is just too much trouble to get permission when it’s required. I’ve heard stories of employers getting fined for hiring too many people! Peter Schiff summed this up pretty well in this video in the first 5 minutes. The whole thing is worth watching.

4 – GET INVOLVED IN THE PROCESS

The last thing John Maxwell talks about when problem solving is to actually get involved. If you have done all the work in figuring out the problem and getting all the facts and then appoint someone who doesn’t have the right information to solve the problem, don’t be surprised if the problem doesn’t get solved. Part of the process is selecting people to help solve the problem, but this involves selecting the right people. He goes on to say that you have to evaluate the solution, and then set up policies that should prevent the problem from reoccurring.

Today, there are too few people taking this step when it comes to the problems with the economy. If you don’t find the real cause, or the real problem, you are not going to be able to set up anything that will stop it from reoccurring. We can see this is the case when we look at the economy over time and through history. This, in my opinion, is due to the fact that no one is evaluating the solutions effectively.

You have to look at history, and what happened when certain policies were put in place. You have to be ready to evaluate what you have done, see if it works, and change things when it doesn’t. It’s all about the PDCA process. Plan – Do – Check – Adjust. Once you have the plan, you do it. Once you have done it, evaluate what worked and what didn’t. If there are still any problems, you have to adjust and come up with a new plan. You repeat the process.

This whole process is completely ignored today, and has been throughout much of history. We can start by looking at the Great Depression and see that when the economy started to crash, there were many things attempted by the government to stop it (stimulus, regulations, etc.) yet the depression went on until after World War II. No one was able to determine that what the government was doing was not working; and so public officials tried doing the same thing over and over again for years. The crisis which started in 2008 is another perfect example. After the crash, we should have looked at the tech market crash of 2000 and it’s effects and seen that the solution the government came up with is what caused the 2008 crash.

With the 2008 crash being the most recent, this is really where we can see the evaluation portion being ignored, or at least greatly mishandled. What the government did was bail out the banks, the Federal Reserve lowered interest rates to almost nothing to spur spending, and the government was creating all sorts of stimulus activities. After a couple years, it should be clear this didn’t work – but they refuse to consider that they may have been wrong and simply stated that they didn’t do enough. The same excuse was used during the Great Depression. Instead of evaluating what they did constructively, they want to do more of the very same thing, and change nothing. The Federal Reserve has reduced the interest rate to almost zero, and can’t reduce it anymore. Even though this didn’t work, they will not admit it was wrong, and still want to print more money!

We need our leaders to be properly involved with the process if the problems are truly going to be solved. We need them to start listening to those who have predicted the problems we have, who have tried to warn us. We need our leaders to study the principles of leadership. All leaders are readers, constantly striving to improve themselves. If those in charge are not reading materials in the areas they are expected to lead, then they are not truly leaders, but just in a position of leadership. We need our leaders to be leaders.

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One Response to “Problem Solving and the Economy”

  1. Ken Botes says:

    Hi
    A masterpiece in todays society and forever more.
    One thing though!
    Attacking the problem,not the sympton always seems to be a money issue.
    How much money can I make out of this?
    Tragic but true.
    Ken Botes

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