Conclusion

The United States economy is such a complicated machine to understand. With so many different ways to understand what’s going on, there are an equally impressive number of solutions to the problems at hand. In a lecture at the London Institute of Economics and Social Science in June 2011 Tim Harford, known for coming up with unique ways to approach disasters and other major issues, talks about disasters that happened around the world in recent years. He focuses on man-made disasters that caused economic crises.

Harford is someone who talks about risk taking and thinking of new and sometimes unusual ways to prevent future crises based on past ones. Harford believes that in order to understand what happens to our economy during a crisis we have to understand what caused the crisis. He says in the lecture, “I needed to understand how these very tightly coupled, complex systems, industrial systems operate because maybe that would tell me what went wrong in the city, what went wrong on wall street.” His first example was an insurance problem that happened about 20 years ago. An insurance company insured an oil rig that was fitted to pump gas. The company wasn’t sure that they could pay in full if the rig had some kind of emergency, so they had their insurance insured by another company. This is called reassurance. Well this other insurance company also had to get reassurance with a third company, who ended up getting themselves insured by the original company. This safety net of reassurance had set up the whole system to collapse if anything disastrous happened to the rig.

Needless to say, the rig blew up. The insurance companies were all interlocked and all they could do was pass the debt around the table until finally the whole system collapsed. Harford realized that the system he had to understand was the system that malfunctioned on the rig, not the insurance system. The most important point that he makes is about complex, tightly-coupled systems. A system that’s complex is something that can’t be completely understood by one person alone; it takes multiple people to function properly. Tightly coupled systems, as Hartford explained, are like dominoes stacked together where you flick one over and they all fall in a series of chain reactions. He explains how simple, tightly-coupled systems and complex, loosely-coupled systems are perfectly acceptable. However, complex, tightly-coupled systems are inevitably going to fail, and when one part of the system fails the whole system is going to fail.

Harford explains how he believes that the financial system exceeds the complexity of the most complex systems in our advanced society and as we all know it is extremely tightly coupled. This makes the financial system extremely difficult to experiment with. He also refers to some people that made a book that was all about problems caused by safety systems such as a fire being caused by a fire alarm. He explains that because some safety systems don’t necessarily help and can sometimes be the cause of a problem, it only makes the system more complex. He uses another example of a nuclear reactor near Detroit that almost killed 75,000 people but didn’t actually kill anyone because the problem was fixed. The reactor was behaving erratically and no one could figure out why. The people working at the reactor tried cooling it down but it was just getting hotter. After about a month they realized that a crushed piece of a safety device had been knocked loose from inside the reactor and had ended up blocking the drain for the coolant; a safety device almost causing a disaster.

When more and more safety features are introduced into a system it creates new ways for the system to fail. More ways for a system to fail mean that it is harder to diagnose a problem when one arises because there are too many possible causes, some that no one could predict. The whole point that Harford tries to make in the video is that safety systems put in place within financial systems have caused some financial crisis such as the insurance company issue that I spoke about earlier.

As Steven Levitt and Stephen Dubner wrote in their book Freakonomics, “One year we’re told bonding is the key, the next that its birth order. Wait, what really matters is stimulation. The first five years of life are the most important; no, the first three years; no, it’s all over by the first year” (Dubner, 2005). They were talking about the key to raising a child in the most beneficial way and how the best solution seems to change every year. The same can be said for how to fix America’s economic crisis.

The movie I.O.U.S.A. stated that various reforms in our economy are the first step that we need to take. We consume more in money than we can produce, requiring us to borrow money. The first step of reforms would make that need for money significantly less. An older man in the movie talked about how when he was a kid everything in the economy was doing great. His generation was the first where everyone went to college and that could accomplish anything they put their mind to. Now that things have changed he believes that expectations are becoming more realistic. He mentions how his parents grew up in the depression and that they were grateful for everything they had, and that his children were most likely going to have to adapt and start being happier with what they have.

Weather some, all, or none of these suggested fixes are used one thing remains true; something has to be done. The concern has been openly stated that this massive debt is just going to be handed down from generation to generation until the entire economy collapses. People are doing more now to stop this from happening than ever before. However, if we have already dug our hole too deep then we might not be able to stop this from happening anymore. The solution may be out of our hands and in the hands of those countries who we have borrowed these trillions of dollars from. Whatever happens next is anyone’s guess. The debt is growing rapidly. "Forty thousand dollars per person we owe, who's paying that?" (Blanchard). Are we going to pay off that debt or leave it to the next generation. People make speculations on what the future of America’s economy every day but the time for speculation is largely over and the time for change has arrived.