“Act and learn” versus “debate and wait”

By Mohamed El-Erian
November 14, 2011

By Mohamed El-Erian and Michael Spence
The opinions expressed are their own.

In formulating policy, the process and the mindset can have a significant impact on the success or failure of outcomes. How you do it can be as or more important than what you do.

In today’s western economies, this observation may go a long way in explaining why policy outcomes have consistently fallen short of what policymakers themselves have expected, let alone what is needed to address important and growing economic challenges.

Signs of disappointing policy outcomes are, unfortunately, all around us. Over the last two years, American policymakers have failed miserably to lower persistently high unemployment despite a series of stimulus measures, fiscal and monetary, conventional and unconventional. In Europe, the debt crisis has spread despite numerous summits, declarations, policy actions and political changes.

In both cases, policymakers identified and sometimes mis-identified the problems and took highly publicized steps to solve them. Considerable financial resources and political capital were deployed. The credibility of policymakers (and policymaking itself) was placed on the line. Yet to no avail. The identified problems not only persisted, they deepened.
When one compares policymaking episodes around the world – successful and less so – it seems clear that there is more at play than the content of policies. The mindset of policymakers and the process of policymaking seem to also have a lot to do with the disappointing outcomes. Indeed, one often hears policymakers point to political dysfunctionality as being the major hindrance to good outcomes.

In the US, it is the highly polarized nature of the political discourse and the associated lack of a “center.” In Europe, it is the need to get universal approval from the seventeen members of the Eurozone in what is often a cumbersome process that pits European necessities and realities against national interests and individual political party posturing.
As valid as the political constraints may be, we believe that there is something even more fundamental at play. It is not just about politics. In the last few years, the policy mindset has been unhelpful and, as a result, the sequencing outmoded.

Western policymakers have been hostage for too long to a cyclical mindset. Their economies have been going through structural and secular changes brought about by major re-alignments at the national, regional and global level. Repeatedly, the extent and duration of the ongoing economic changes were not sufficiently understood and embraced. As a result, economies have suffered rather than evolved.

Sequencing has also been problematic. Too often, in both America and Europe, policymaking has started with the available set of policy measures and asked what can be achieved. As a result, the process has been overly constrained, unimaginative, at times timid, and excessively slow to adapt to shocks and structural shifts.

In this area, the west could learn from the experience of developing countries. Whether they like it or not, these countries have traditionally lived in a secular space with constantly shifting non-cyclical internal and external structural forces at work. Policy formation has had no choice but to adapt to this reality and, in some countries, has done so very effectively. Indeed, both policy mindset and sequencing have evolved in a manner that has allowed for better outcomes – not only when it comes to moving forward with determination, but also in showing greater resilience and higher agility in the face of both positive and negative shocks.

In simple terms, here is how it works. Policymakers identify a multi-year destination — a “vision”. It is explained widely, discussed broadly, and repeated often. It is characterized by both quantitative and qualitative elements. Then policy priorities are set with the goal of coming as close as possible to achieving the multi-year end-point.

From the start, there is explicit recognition that – by the very nature of the dynamics, and especially given the fluidity of the global economy – not every step of policymaking can be specified ex-ante consistent with the destination. Instead, it is about identifying the first series of steps and then evolving appropriately and responsively. This evolution involves a process of continuous learning, midcourse corrections, experimentation, and the development of new instruments. Act and learn, rather than debate and wait, best describes the approach.

The government’s role, as legislator, regulator and influencer of economic behavior is clearly defined as supporting private sector dynamics and adjustment. Like the market side of the economy, it adapts to the constantly shifting structural reality.

Some will be tempted to dismiss these approaches by characterizing them as returning to the “bad old days” of “central state planning.” It is not, and they should think twice before doing so.

What we are talking about, and what we have observed in some countries around the world, is more akin to the effective strategic planning that goes on at the level of a successful private sector company. Indeed, it is essentially what has marked the brilliance and success of great corporate leaders, including the recently deceased Steve Jobs.
If we get the policy making process right, the potential benefits are huge.

In the US, there is a massive buildup of investible cash in the corporate sector, a resource waiting to be used. There is also a large and growing pool of unemployed labor, another resource waiting to be used. A better policy process can bring these two together in a very effective manner.

Any five year destination plan includes a detailed restoration of growth and job creation coupled with the rebalancing of the economy and with an expansion of the tradable sector, employment and competitiveness. There are skills, educational and infrastructure deficits to be overcome, and regulatory impediments to remove (including tax policy that adversely affects growth and the productive deployment of the two key underutilized resources). Government’s role is to close the gaps and deficits. The optimal mix of reforms and policies that will work is not necessarily known in advance. Instead its about starting a process and learning from it — and, in the process, avoiding and mistrusting simple formulas and claims of a policy “killer app.”

In Europe, the process should start (rather than end) with a very explicit determination of what the Eurozone should look like in 3-5 years. Does it involve a fiscal union among the seventeen existing members, supported by much deeper political integration and much greater delegation of national sovereignty to the regional level? Or does it involve a smaller, less imperfect union of countries with similar initial conditions? Once this is decided, it will be much easier to move aggressively on the other parts of the required solution.

Whether it is Europe or the US, the welfare of citizens – indeed, the well-being of the global economy – requires much better pragmatic and adaptive policymaking. The more this is delayed, the greater the social damage is associated with subdued economic growth, persistently high unemployment, recurrent financial crises, and growing income and wealth inequalities. A fundamental review and reform of “how” policymaking takes place can go a long way in improving outcomes.

Photo: Michael Spence.

9 comments

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The big difference of today’s economic reality is that politicians and taxpayers knows that everything is no longer possible. No longer is it “If we spend it they will pay”.

There seems to be agreement between all parties that we can’t keep doing what we are doing. We are spend far more than we have…governments are mortgaging our future to pay for present largess. We are getting very poor return for our tax dollars expended. There seems to be agreement between all parties that we can’t keep doing what we are doing.

Our challenge is to (1) build on this to find common cause as to our future destination, and (2) leave the details of how and when to the political ideology that can persuade a majority of “hearts and minds” to each necessary course of action.

The goal must be a consensus at all levels of government to:
(1) separate and assign all line items” for budgetary funding onto a list of “needs” and “wants”.
(2) Commit to prioritizing the funding of our “needs”.
(3) If available revenue is insufficient, presume that we still have “wants” on our “needs” list, and move them over.

Give the people a genuine voice in revising our tax system, for it is what, by and large determined the ultimate society we live in, it’s goals and related potential. It’s, after all, their “game”. They need to “have some skin” in it!

Posted by OneOfTheSheep | Report as abusive

The US can do many things to solve the unemployment problems that poor government policy has created. Here are a few:

1. Tariffs on low-wage countries

2. Tariffs on currency manipulation

3. Direct loans for new business creation

4. End all wars and bring all troops home from every single country

5. Bring about more direct democracy at the state and Federal level and increased representation in the executive branch

Posted by M.C.McBride | Report as abusive

I recently saw a talk by Dr. Noam Chomsky (in Australia, as he is effectively blacklisted in the US mainstream media) which covered a range of global issues. As an aside, regarding the current US fiscal debate(s), he suggested that the current account deficit could be reduced and perhaps even be brought into surplus with the simple act of having a European style health care system (approximately). It’s iteresting that this easily verifiable claim is not more rigorously discussed/assessed. Finally, the handringing and pontificating by the financial class, after having been an active participant from the start, is getting somewhat tiresome.

Posted by futuresmkt | Report as abusive

I have a big problem with the point of view presented in this opinion piece. The best way to make policy is to two sides to square off and take over the public discourse on important issues with take-no-prisoners barrages of lies and half truths. This allows the two sides to make decisions based on which side gets to put its minions into positions where they get to make decisions in important public policy areas in which they have no expertise — and then to make those decisions based on purely political considerations that ultimately reduce to pandering (not always a metaphor). This idea about making decisions based on some objective concept what what is best for society as a whole is a complete crock.

Posted by Bob9999 | Report as abusive

The “enlightened” leaders currently exist in China, where national policies are aimed at building the country. Western leaders should take note.

Posted by KyuuAL | Report as abusive

I am a little bit confused here:

El-Erian thinks that both US and the EU has been suffering from policy making. He advises them to do it as the developing countries do it: Set a multi-year vision, discuss it broadly as you start implementation, revise your vision along the way. This is some sort of trial and error, or as El-Erian calls it, “acting and learning”.

Of course, speed in policy making is important. But isn’t success more of an issue of process rather than speed?

Ahmet Kara
http://plus.ly/kahmet

Posted by kahmet | Report as abusive

KyuuAL, you seem to get the point of this article. Chinese central government system is very efficient and has the power to create, set, hold, and execute a “vision” without another party stepping in to muddy the waters. Similarly, small, developing countries typically have more power to direct and control resources than larger, Democratic countries. But strong, central governments are not the only way to achieve more pragmatic and adoptive policy making that Mohamed El-Erian and Michael Spence are talking about. Democracies can find win-win solutions if they take a macroeconomic view without catering to microeconomic policies that benefit a few.

I believe that the underlying problem of large representative democracies is the power of special interests that do not have the benefit of the whole society in mind. The various mechanisms these groups use to influence voters and policy makers are short sighted and divert attention away from any common vision. However, the US Supreme Court blew the lid off any limits to their power when it gave Corporations rights under the first amendment and the ability of special interests to influence policy at an unprecedented scale.

The Tea Party and Occupy movement are representative of the distrust people have with their Government. Right now they are on opposite sides of the policy spectrum. Hopefully it is just a matter of time until they discover that their common enemy is the unbalanced influence of special interest groups, and not the Government.

Posted by LEEDAP | Report as abusive

I respectfully disagree with LEEDAP.

While I disagree with the “tea Party” on more than a few issues, I truly believe all Americans owe them thanks for being the first and only people to genuinely challenge the American political culture of BOTH parties in Washington of “If we spend it they will pay”. The best POSSIBLE Debt Commission outcome, for all the posturing, bickering and finger pointing, only slows the RATE at which federal spending is STILL increasing!

What part of “unsustainable” do our “representatives not understand? The unavoidable path to sustainability AND lessening of EXISTING debt is to:

(1) Separate all currently funded “line items” into “needs” and “wants”. That’s the hard part, because, ideologically one side’s “need” is the other side’s “want”; and each KNOW we can’t even fund all genuine “needs” with the economy as it is.

(2) Agree on the percentage of current and reasonably expected revenue for the next year to budget for (a) needs, and (b) debt retirement. Yes, we may have to put off (b) for now, but having it “on the list” means that it is a recognized goal to be addressed when that is deemed appropriate. Otherwise, it’s just another irrelevant concept; an abstract number unrelated to reality.

ONLY when congress has shown itself competent and willing to do these things should taxpayers even CONSIDER giving these people more tax revenue. So long as they cannot properly prioritize the huge amounts already entrusted to them, giving them more without meaningful understanding of the need for fiscal restraint is like trying to put out a fire with gasoline. Tax revenue is the crack cocaine of politics, and so long as there is an uninterrupted supply no one is going to think straight or adopt and work toward common goals.

Posted by OneOfTheSheep | Report as abusive

the authors seem to suggest that “act and learn” can replace cycles as “western policy makers are hostage to a cyclical mindset”. Our entire existence is based on cycles from seasons to birth-death we existence in a universe of cycles thus trying to ignore or remove cycles would be futile. The problems in the US, Europe and Japan start with a credit-based monetary system and old demographics. We can create a new monetary system not based on credit and debt but we cannot as easily change the demographics of these advanced economies. All of this has to play out and it will be a long and painful decade.

Posted by FredBearSamurai | Report as abusive