Predictive Analytics and the Fiscal Cliff

Anyone who’s glanced at a news Website over the past few weeks knows the United States is veering toward what’s known as the “fiscal cliff,” in which massive tax hikes and program cuts will take effect unless President Obama and the U.S. Congress come to an agreement over the budget. Some economists believe that the hiked taxes could send the country spiraling back into a recession.

Can predictive analytics help prevent that plunge off the cliff? That’s the topic of a new research note from the Mesabi Group’s David Hill, who argues that a solid model can help economists and lawmakers determine the effects of policy actions. The Congressional Budget Office, he points out, already uses a pair of complex formulas—the Solow-type growth model and the life-cycle model—to determine the impact of federal taxation and spending.

“The output of economic models is not as easy to accept as business models that may give results (such as increased revenues) that everyone finds acceptable,” Hill wrote. “Instead, the outputs from every policy action may have some positive benefit, but also have an unpalatable side effect.” While such tradeoffs are painful for everyone, he added, the models themselves could potentially act as a jumping-off point for discussion about the issues at hand.

More to the point, models can serve as an “independent reference” for both short- and long-term policy effects. But the application of such models also requires a fair degree of political will, as well as the collective ability to discuss “imperfect solutions.”

“That raises a challenge to IT in general but also to IT vendors in particular,” Hill added. “Using predictive analytics to increase transparency to proposed governmental policy decisions should be an important point, and that will become an ongoing goal.”

But that opens the door to more questions: can legislators agree on a particular set of analytical tools and data-sources as independent and unbiased? Which IT vendors and political organizations could assist in efforts to model the possible effects of policy? Given the virulence of the current political infighting, it seems difficult to believe that those involved in the budget debates could reach a consensus on models and analytical tools. Nonetheless, the use of such analytics in policy debates remains an interesting idea.

 

Image: Torian/Shutterstock.com

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