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The World’s Economic Problems are Like 2 Cross-Wired Thermostats

Many years ago I did some work at a newly built manufacturing plant in Phoenix. The new plant was having trouble with its air conditioning system  — the administrative offices were too cold and the manufacturing shop floor was too hot. While I was there it was discovered that a mistake had been made during installation: the air conditioning system for the shop floor had been wired to the thermostat in the administrative offices, and the air conditioning system for the administrative offices had been wired to a thermostat on the shop floor. It’s funny in hindsight: the people in the administrative offices would be cold so they would turn the thermostat up. The people on the shop floor would be hot so they would turn the thermostat down. Thus the temperature problem was created by cross-wiring the two thermostats.

I was thinking the other day that our world economic problems are similar.

On the one side we have the consumers who are being battered from every direction. They’re losing their jobs, their 401(k) retirement accounts have lost much of their value, gas prices are high, home values have dropped, and adjustable rate mortgages are increasing their payments.

On the other side we have businesses who are being battered as well. Consumers are spending less, so revenues are down. Investors are living in fear, so it’s difficult to fund new development or — in some cases — even generate enough cash to pay the bills. Other countries aren’t doing much better — it’s not just a U.S. problem. Businesses are in a slump, and the future doesn’t look great.

Like 2 Cross-Wired Thermostats
We have the same cross-wired situation between consumers and business. Consumers control the “temperature” of businesses, since their purchases make businesses successful. On the other hand, businesses control the temperature of the consumers, since they provide jobs and since business investment forms the basis for the stock market and those 401(k) investments.

See the problem? It’s just like in that manufacturing plant: The consumers are feeling “hot” so they’re turning down the heat on business by refusing to buy. And the businesses are feeling “cold” so they’re turning up the heat on consumers by laying off workers, tightening consumer credit and in some cases raising prices.

A Solution
Now in the manufacturing plant we had the option of rewiring, but that’s not an option for the economy. No, we have to live with the idea that consumers and business are interdependent — that’s what capitalism is all about. So what can we do instead to solve the problem?

In the manufacturing plant we needed to provide a short-term solution for our cross-wiring problem until the electrician arrived.  So we set both thermostats to a “normal” position (one that wasn’t too hot and wasn’t too cold). Then we fine-tuned the thermostat settings by making small changes, waiting to see how it affected the other part of the plant, and then revising as needed.

How the Government Fits In
If you think about it, this is the same thing that the U.S. government has been trying to do (and probably other governments as well). The government has tried to take steps to make both business and consumers act like things are “normal” even though it’s somewhat artificial to do so. “Stimulus payments” and “recovery rebates” are ways of providing short-term money to help consumers begin to feel normal again. Government “bail-out” of banks and a few key industries is a way of helping business get back to normalcy.

So the solution is to have the government help consumers and businesses feel like things are normal on a temporary basis. And if things go right, then both consumers and businesses will begin to count on things being normal in the longer term, and the economy will recover. The stock market will recover, consumers will spend, businesses will once again become profitable, and out-of-work consumers will get jobs.

You’ve Got to Believe
Will this work? It worked for our thermostat problem in  Phoenix, and I believe that it will work for the economy as well. I encourage each of you to believe it because believing in this solution is what makes it work.  Like Dorothy in the Wizard of Oz, we’ve had the power to go where we want to go all along — we just have to use it.

So close your eyes, click your heels together, and repeat after me, “There’s no place like a good economy. There’s no place like a good economy. …”

Sidebar: A Business IT Application of this Principle

And while we’re on the subject of cross-wired thermostats, this metaphor works for Business and IT as well.  Business controls the perception of IT, and IT has a large impact on the effectiveness and efficiency of Business.  When Business views IT as failing, then Business tends to micro-manage IT.  This usually results in further IT failures, since most people in Business don’t really understand IT.  Thus we get a downward spiral, just like a downward economic spiral.

Sometimes we need to “push the reset button” on Business and IT views of each other, just like we’re trying to reset the economy.  This gives both parties a chance to develop a new working relationship, and things can improve from there.

So if your company’s perception of IT is stuck in a downward spiral, call a truce, get everyone to agree to put the past behind you, and try to move forward with a new view of IT.  If you’ve got the right people leading IT, then this will stop the downward spiral and start an upward spiral in its place.

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  • Harwell August 5, 2009, 9:57 am

    Someone asked where economic naysayers fit into the thermostat metaphor. You know who I’m talking about — they’re the negative people who continue to lambast the government, business and almost everybody else. They criticize the situation we’re in, gripe about how bad it is, and debate endlessly about the cause.
    Think about it. Does it help the temperature in that manufacturing plant to gripe about the problem? Does it help to blame the problem on someone? Does it help to criticize the people who are trying to solve the problem? No! In fact, it makes matters worse because it distracts people from what’s really important — solving the problem.
    I remember a quotation from Thomas Paine that Ted Turner used to live by, “Lead, follow or get out of the way.” I think that applies here. My advice to the economic naysayers is to get out of the way — if you’re not contributing to the solution then you’re part of the problem.

  • Chaos Motor August 5, 2009, 4:42 pm

    Please explain why you think we should trust government to fix things when government screwed it up in the first place?

    • Harwell August 5, 2009, 5:16 pm

      Thanks for your comment.
      1. I’m not saying that “we should trust government to fix things.” I’m saying that what the government is doing is helping, but that to “fix things” we need to get back to a “good economy” state of mind. The government contributes to that, but consumers and businesses make contributions as well by getting out of the bunker mentality we’ve gotten into.
      2. I don’t know why you believe that “the government screwed it up in the first place.” The causes of our current economic situation are complicated, but if there’s any single cause (and I don’t know that there is), it’s probably related to banks being too aggressive in marketing mortgages to people who can’t afford them. This was further complicated by the creation of mortgage derivatives (again by banks and financial institutions) which hid the unsafe mortgages from derivative investors. In a nutshell, I would say that greed from the banks and investors caused the economic crisis — their greed pushed them too far in their quest for new mortgages. Where government failed — if it failed — was in not catching and stopping the banks before things got out of control. But of course this is a philosophical debate anyway, since many people believe that less government regulation is better. In theory, government regulation shouldn’t have been necessary, since the banks, their boards of directors and their employees had an ethical responsibility to act responsibly. They didn’t act responsibly, the government didn’t catch the problem, and now we’re all paying the price.

  • Jeff Staddon August 6, 2009, 2:24 pm

    I’d like to compliment you on an interesting and well written article. However, I’d like to point out that the basic assumptions underlying this article are deeply flawed. Everyone believes them–for many years I believe them too. But nonetheless the article is deeply flawed.

    First, there is the implicit assumption that money is a constant–similar to temperature. The exact opposite is true. Money is a commodity with a value that varies greatly. There are countless examples—a notoriously example is that a dollar today will buy twice as much house as it did a couple years ago.

    Second, there is the assumption that recessions/depressions do not end without government intervention. Historically the opposite is true. Recessions/depressions are self correcting, unless government intervenes. Most notoriously Japan’s Lost Decades and our Great Depression. Unfortunately, our collective oral history remembers only the recessions that couldn’t self correct so we confuse cause with solution.

    Third, there is an assumption that recessions are financial events. The cause is actually a misallocation of labor. This misallocation typically is created by a credit bubble that draws resources away from productive activities into pseudo-productive activities. (Usually good activities, but too much of it) The solution is to reallocate the unnecessary bankers, construction workers and auto workers into productive activity.

    The common government solutions all work directly against this. Bailouts attempt to keep misallocated workers misallocated. Temporary diversions like building bridges to nowhere and crushing cars are only marginally better since they divert rather than redirect. Quantitative easing (printing money) is probably the worst government solution. For factors that are too technical to get into here a deflationary phase is critical to recovery. (Thinking through this cycle is a very good mental exercise that I’d highly recommend.) To the extent that the Fed/Treasury succeeds in preventing deflation they prevent recovery. Other financial controls like minimum price and wage controls have the same dampening effect.

    From a political perspective the efforts of the Bush and Obama administrations (the short-term economic policies have been similar in both administrations) have been brilliant. But economically the result of these policies (if continued) can only be a prolonged L shaped recession.

    It’s rather frustrating to see this happening and know that the 99.9% of American’s are simply not economically educated enough to understand the mechanisms of what is taking place. My only hope is that we will become frustrated enough that we’ll kick out the current leadership team and bring in a new crowd.

    • Harwell August 7, 2009, 8:59 am

      Thanks very much for taking the time to write such an extensive comment. You may be right, or you may be wrong. The trouble with economics is that the real factors at work in the economy are so complicated that no one — not even the best economist — really understands what’s going on. That’s not to say that they don’t think they know what’s going on — economists are the kind of people who are often wrong but seldom in doubt. But history is the only judge of what really works or doesn’t work, and even then we can’t be sure, since history itself is open to interpretation as to cause and effect. As Laurence J. Peter once said, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

      Compounding the problem with economists is that they choose to offer solutions that are as complicated as the problems. When you take the uncertainty associated with diagnosing a complicated problem and then compound the uncertainty by adding a complicated solution, there is little chance that things will work out as the economists hope. That’s why I feel we need to address things at a higher level — focusing on the simple instead of the complex.

      Fundamentally — and regardless of all of the technical definitions — a bad economy ends when most people feel that it’s over. It’s that simple. Harry Truman wasn’t wrong when he said that “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” A bad economy is personal: it’s all in the way that you react personally to the economic climate around you.

      You mention a few historical economic events in your comment and say that “recessions/depressions are self-correcting.” I agree with you that economic events in the past tended to be self-correcting (although who’s to say how their end was affected by attempts at correction). Much like a musical tone struck by tuning fork, the oscillations would eventually fade away, and normalcy would return.

      But let me point out a key difference between then and now: the Internet and an era of instant communication. Where in the past there were relatively few news sources (mostly newspapers and more recently a few respected news radio or TV stations), now there are Internet and television stations that take specific points of view and drill those points of view into the reader/listener/viewer. Strike a tuning fork in today’s environment, and you’ll find that the oscillations will be amplified, reflected, and bounced back to the source. Loud feedback will be the result, and the oscillations may not fade away until some of the feedback sources stop.

      In my days of systems theory we used to call this a “nervous system” — a system that overreacts to the slightest disturbance and therefore amplifies small events to make them into bigger disruptions. I fear that the world economy has become such a nervous system, and thus my plea to “reset to normalcy” is not just oversimplicity — it may be our only hope.

      It doesn’t matter to me whether it’s government, business, the press, or anyone else who leads the charge to reset to normalcy. I give some government examples in my post but I’m not saying the government ought to be the only way to restore the economy to a calmer state. If anyone has a better way then by all means let’s hear some ideas. But I’m not convinced that an “ignore it and the problem will go away” strategy will help much with today’s nervous system economy.

  • Jeff Staddon August 7, 2009, 2:11 pm

    Thanks for the reply. I like the “nervous system” concept. I think that a good first step towards restoring less “nrevous” system would be tighter controls on credit. The good news is that this seems to be happening. (Both through consumer self control and by government legislation.) Credit is like a hot stove–the red hot burner is irresistable to a child who has never felt it before. It does seem that every few generations the credit abuse lesson has to be re-learned.

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