• 12/06/2012
    6:24 AM
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Predictive Analytics and the Fiscal Cliff

The threat of the fiscal cliff has immense implications for the U.S. economy. Can predictive analytics play a helpful role in keeping us from going over?

The responsibility for action on taxation is a joint responsibility of Congress and the president. The challenge they face today is not only to come up with a short-term fix, but also a long-term solution. In the short term, failure to come to agreement could result in a self-fulfilling prophecy of a recession if businesses think that a recession is coming and make cutbacks (such as number of employees or budget cuts) that really aren't necessary.

The fix applies only to short-term issues and does not address long-term concerns, and it could induce paralysis among enterprises that are unsure how they should act, leading them to take no action to expand (including employment) as much as they should.

The 17th century French economist Jean Baptiste Colbert is credited with the maxim, "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing." That statement probably applies not only to taxation, but also to budget or expense reduction. One result would be to ensure that actions are staggered incrementally over time to prevent any response of the economic system that has overly negative consequences (and prevent much "hissing," though each impact in and of itself does not represent a tipping point).

Analytical models can also serve as an independent reference point to display what the expected impact of policy decisions might be. Although they cannot literally force decisions, they can serve as a focal point for discussion and negotiation. By no means are they a panacea or predictors of a certain future, but they are the best that we can do.

Mesabi Musings

Recall the wisdom of Dr. Samuel Johnson: "Depend upon it, sir. When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." Hopefully, such concentration will result in policy decisions that will prevent having to deal with a crisis that could and should be avoided.

Also, the use of predictive analysis tools, such as the CBO computer-based economic models, will--we hope--help the decision makers concentrate their thinking and lead to decisions that, unlike a condemned man unable to avoid his fate, will allow all of us to avoid being hung out to dry. Let's hope that the politicians turn into statesmen who recognize that no solution they implement will be perfect, but that the overall benefits should more than make up for any defects.

And that raises a challenge to IT in general and IT vendors in particular. Using predictive analytics to increase transparency to proposed governmental policy decisions should be an important point, and that will become an ongoing goal.

So questions arise: What other solutions, in addition to economic modeling tools viewed as independent and unbiased, should be brought into the discussion? Are there any advanced analytics tools that are not currently being employed that could be used? Can big data play a role, with its ability to analyze masses of data from multiple sources? What can be done not to predict the exact nature of an unexpected shock to the economic system, but what its impacts could be? What politically independent organizations, including IT vendors, can ably and effectively assist in these efforts?

All of us (literally, not only in the United States) have a big stake in the promotion of sound economic policies. We know our government leaders have the tools. Let's hope they use them well.

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