The Corporate Law Group

Static v. Dynamic Modeling

Remember the 1993 movie, “Dave” with Kevin Kline? We love that movie. We especially love the scene where Kline calls in his accountant friend (played by Charles Grodin) and they work to cut the US budget to save a program. You can see the clip here.

When any of us budget, we generally use dynamic modeling. We account for the changes that will occur as a result of our actions. “Well, to make the mortgage I would have to work four more hours each week, but because we need more babysitter time, make that six more hours.” That’s dynamic modeling. We account for the extra babysitter time. We don’t pretend that nothing will change along with our new plan. We are honest about other things affected by our changes.

But that ‘aint how Congress does it. The Congressional Budget Office uses static modeling. Raise the tax rate to 100%. They assume we’ll all keep working just as hard despite gaining nothing by it. In other words: They lie. We say, “Who cares?” The CBO’s advice is intentionally off so they’re irrelevant. Dynamic modeling is more truthful even if your model isn’t perfect.

One thing is for sure: Things will change. Henry Hazlitt wrote a book in 1948 called Economics in One Lesson. That lesson is that whatever you do to an economy, you create all kinds of unanticipated consequences. And no matter how conceited you are, you will never be able to model the consequences of your tinkering. Hazlitt includes several examples from the 1940s. The market is far more nuanced than any computer model you can create. That’s why Adam Smith called it the invisible hand.

1. Outlaw price gouging after a disaster: No one supplies water because there is no incentive to work hard to get it into the damage zone.

2. Bail out a big bank: The bank takes more stupid risks.

3. Raise the minimum wage: Kids get fired.

4. Protect an airline: They drag a passenger down the aisle.

5. Raise the tax rate to 100%: You get no revenue because everyone stops working.