Unintended Consequences: Decision-Making and Economic Interconnectedness

Issue 151, March 14, 2024

We’re entering the fray in the debate on the economy. And central to this debate is a refresher focused on our inability to make connections, see patterns and anticipate how micro and macro trends can radically and consequentially compromise our approach to solving real or perceived problems.

In solving what we see as immediate problems (low wages, inflation, price-gouging, lack of skilled workers and migration as examples), there are often unintended consequences because we simply don’t see what we don’t see. We don’t connect the consequential lines across a myriad of factors and variables to understand the impacts, changes and influences across a system or set of systems.

Linear Focus

When there is real or perceived urgency to solve a problem (including responding to public opinion and sentiment), the solution often follows a linear focus. Point A identifies the problem sought to be solved and Point B describes the solution. “Great,” the leader exclaims, “Let’s move forward!” What is typically missed is the interconnectedness of the factors and variables across the spectrum of the system or systems. This includes where factors and variables intersect, how they feed and influence each other, and how they are interdependent to operate effectively. It is important to understand that every system — be it global, a society, a collection of countries, an organization and even a family — is comprised of few to many individuals and factors with interdependencies and relationships that are internal as well as external.

The default knee-jerk reaction of linear thinking can be fatal for an organization seeking to adapt to continually evolving macro and micro shifts in the market, the population and society overall. Here’s another way to look at it. Consider what you see in a kaleidoscope as you turn the lens and see elements of the image come together, merge, separate and disappear. There is a repetitive pattern and interdependence among each of the elements, all of which are necessary to ensure the system functions as expected and hoped for (even without knowing or seeing all of the interplays). The elements have relationships with each other (antagonist or protagonist). Even when they seem to separate or even disappear, they still have influence and interdependence. When we don’t consider or recognize all the related and inter-connected influences and dependencies, we unknowingly impact other parts of the system or systems creating unintended consequences.

Our Economy and Its Interdependent Systems

Consumer sentiment has consistently been in the tank for the past year, only recently has it begun to improve. Price gouging, high-interest rates, the ever-increasing cost of feeding a family and seemingly unending inflation have caused most people to feel unhappy and frustrated, if not downright fearful of the future. Add to the mix higher taxes, illogical increasing and decreasing petrol costs, new or increasing fees for carryon or checked luggage, streaming subscription cost increases and so much more — all feeding into mitigating any salary gains workers across the spectrum might have received.

It can seem like hell out there to maintain a standard of living when the larger economic system seems to be failing us at every turn. Changes made across the economy have upstream and downstream consequences. Consider some of the following:

• Hidden Costs

Across the US, there are several prevailing mantras: Buy American. Rebuild America’s industries and manufacturing. Let us turn our attention inward to meet our own needs and not worry about the rest of the world.

Perhaps you also believe that nationalism is the best course of action to solve real or perceived problems. Surely buying “local” supports American businesses. What we don’t consider is that America enjoys significantly higher working wages compared to many countries across the globe. As such, in order to produce local/regional or national products, we must account for a workforce that demands a fair (high) wage.

Higher wages combined with higher costs of living (or for an organization, operating in the US) set the market price for goods and services. Since a company must make a profit or at least cover the costs of production (including manufacturing, administrative, taxes, fees, salaries, marketing, shipping and the like), prices in the US are often higher than they would be if the products were produced elsewhere.

In our desire to rebuild America’s industries, we overlook the impacts on our own pocketbooks. When we solve one problem or achieve a goal, we may unlock another problem such as paying higher prices for necessities which takes away from other things we may want or need.

• Trickle Down Economics

Trickle-down economics might imply that upper-level improvements in one part of the system result in improvements that filter down into all parts of the system (more jobs, higher wages, higher quality of products, less product scarcity). In a simplistic context, belief in black-and-white logic might justify this understanding. But life, like all systems, are not binary black and white. There are infinite shades of gray with elements that may be invisible, blended, or hiding.

For the entire economic system to improve, a lot has to happen. There are higher manufacturing costs, increased sales costs and corporate taxes that increase prices. So, wages must be increased across the board to pay for new higher-priced products. It is a vicious cycle that seems to have no end as the goalpost is always moving further away.

• Price Gouging 

Many businesses are dealing with cost increases by raising their prices. Just check out the new price of a McDonald’s burger. Is it hubris? Are they price gouging because they can? The word of the moment is shrinkflation. CPG brands are shrinking the size of their packaging, reducing the amount of the contents inside and raising prices. But honestly, do they really think consumers are that stupid?

Last fall in France, PepsiCo introduced what it called modest price hikes. The result was shrinkflation. Carrefour labeled the U.S. giant’s prices unacceptable and in early 2024 it is no longer selling Pepsico’s products in France, Spain, Italy, Belgium and, most recently Poland.

Actions have consequences. Short-term fixes like shrinking packaging and raising prices can have lasting fallout among consumers who no longer trust the brand. Resignation sets in when customers acquiesce and suck up the higher prices because they have limited, if any ability, to fight or change the practice. We take the hit in our pocketbooks and make harder choices between wants and needs.

• Global Skill Gaps

In seeking to understand US Trade relationships with other countries, it becomes obvious that most countries are highly interdependent in fulfilling the needs of each country’s consumers. Consider what it would cost the US to achieve the level of expertise Taiwan currently has in producing 90% of the world’s microprocessors (those little chips that power everything from our phones, computers, and televisions down to our tire-pressure sensors in our vehicles). We are already so far behind, have such limited capacity and lack the workforce skills to achieve such a goal. The research, development and other related costs to take on the microprocessor business would inflate prices that trickle down into our individual pocketbooks.

• Migration Policy

This brings us to the controversial issue of migration as another example of solving an immediate problem without understanding its wider influences and impacts. Many of us don’t see what we don’t see as we seek to solve the systemic problems across our immigration system. For some, the desire is to build a wall and stop immigration. Period.

Something does need to be done to control the flow of undocumented migrants seeking entry into America’s broken immigration system. We do need to re-establish control over the number of migrants, the lack of infrastructure and resources to process them, and the resulting pressure on our economic system (government at the local, state and Federal levels) in healthcare, housing, and education to support the unsustainably high level of migration through our southern border.

Yes, but. President Biden in his State of the Union Address brought forward the reminder that we are a continent of immigrants going back millions of years ago when humans migrated from elsewhere. Over the history of our country, immigrants have brought skills, contributed to our innovations and added value across our economy.

• Low-Skilled Labor

At times the overall value of migrants may not seem so clear. Let’s raise some value-based clarity from an economic perspective. A low-skilled labor force is essential to support the US consumer society, be it in our agricultural, retail, food service and hospitality sectors. Right or wrong, low wages paid to low-skilled workers who have migrated to the US suppress the cost of production (harvesting fields, caring for livestock, etc.) resulting in steady prices to consumers. The pay scale normalizes the prices paid by the consumer at restaurants and grocery stores.

So, let’s go back to the wall and connect a few unintended consequences. When we tighten our legal immigration processes, it may result in fewer available low-skilled laborers, and we will then need to invest in hiring workers at higher wages. Or we will need to implement more high-tech systems, which then impact the prices we pay and ultimately lead us to having to make harder choices across our wants and needs.

Our government does indeed need to take action with a comprehensive policy that fixes a very broken system. The eventual solution to this real problem must find the balance across a fair and equitable migration policy that does not strain all of our systems. It must be mindful of the consequences to ensure that one, two, or 10 years down the road we can look back and say we anticipated the future, saw what we needed to see and addressed the issues before they became problems.

• Technology

From an economic perspective, we need a robust skilled workforce to meet consumer demands. No ifs, ands or buts. Globally, the population is aging and in most parts of the world, there are simply not enough young people to sustain societal and economic systems. Will high-tech come to the rescue? We hope (almost at the level of salvation) that high tech and access to technology will raise everyone up to at least a level above abject poverty. The socioeconomic factors at play here are deeply complex and more than a simple technology access issue.

To date, the solutions to solve the poverty problem have focused more on establishing a living wage for everyone. In a novel twist, Sam Altman, the CEO of OpenAI, has raised the concept of establishing a universal income — a stipend for each individual as protection against AI that is projected to slowly chip away at what jobs are left for humans to do.

• Fair Wage

There is an increasing divide between the haves and the have-nots. With the shrinkage of the middle class, the ultra-rich continue to grow as fast as the lower end of the economic spectrum expands. How do we eradicate poverty? Again, we need to fit all the pieces of the puzzle together holistically to understand the systemic problems.

The first line of defense in the war against poverty is a fair wage. Even though it is higher than in the rest of the world, the US minimum wage is considered by many Americans to be substandard for a respectable standard of living, especially factoring in recent rising costs for food, housing, and healthcare. There continues to be a push among political factions that the Federal minimum wage needs to be increased with the intent of raising individuals above the poverty line.

Federal action to date has been inaction as there continues to be lack of consensus or the political will to remediate. Nonetheless, many states and cities across the US have moved forward with raising their own local minimum wage standards. California just raised its minimum wage with the intent to improve the quality of life for low-skilled and part-time workers.

Last week the Wall Street Journal published an article reporting the challenges our restaurants and local retail shops are experiencing as they are grappling with higher wages. Many of these establishments are still struggling coming out of the pandemic in to retain staff to meet customer demand, adapting to the higher costs of supplies and contending with the lower-margin and higher cost of takeout orders (including delivery app fees and charges). For some restaurants, 80% of their total business is takeout.

Restaurants will inevitably have to raise their prices to customers even higher when they see no other choice. Wendy’s briefly introduced the idea of dynamic price surging, although they were quickly shot down by customers. From a broader perspective, think about the implications of the loss of local mom-and-pop restaurants, succumbing to national restaurant chains as the only survivors. Can we say we didn’t see it coming?

• The Future of the Workforce 

With the decline in population rates, the lack of a qualified workforce creates scarcity and impacts organizations that need to maintain or grow their workforce to continue to meet consumer demand. If there aren’t enough workers to go around and the only way to fill a gap is by paying a higher wage, the organization will pass higher costs onto consumers. It’s a rock and a hard place. The worker is happy with higher wages with an improved standard of living, while cost increases are passed to customers. Managing this shift requires anticipating the future and recognizing the consequences that will result. Being unprepared will lead to wide-ranging impacts and influences across the entirety of a system.

Consider that we are also still transitioning to find a new model with a post-pandemic workforce. The unemployment rate is currently low, but the expectations of a next-gen workforce are high, which is shifting workplace cultures. Even though the percentage of young Americans graduating from high school is 87% (2019-20) and college is 37.7% (2022), there is an arrogant attitude about work and what work young people want to do. The decision to work for one employer over another is based on an alignment of beliefs and values. Be forewarned that this may lead to worker scarcity. As a result, the decisive factor of maintaining a robust workforce may be higher wages as the only solution.

• Population Shifts

The US, China and Japan are experiencing birthrate declines. The population is trending older in each of these countries. China eliminated their one-child-per-family policy, recognizing the downshift in current and future population (fewer workers, smaller economy, huge impacts), and encouraging larger families. Despite the shift in policy, it will take generations to regain and re-establish prior population highs.

So, with smaller populations, but increasing demands from these consumer-driven economies, who’s going to do all the work? Not to mention who’s going to take care of so many aging people who will require increased assistance and health care.

Study after study shows that Gen Z and even millennials are putting off having children and focusing more on self-care and personal pursuits. They fear the impacts of climate change and they question the quality of life for their offspring. Some are even deciding against ever having children.

Planning Ahead

We are not economists or immigration experts and admit that the issues at hand are complex. Our aspiration here is to promote the necessity to see the patterns and connections across factors and variables influencing systems. If we continue to not see what we don’t see, we stand to continue to make unproductive decisions that come with unintended consequences in the immediate and longer term. In the end, we can never really solve the problem because we didn’t understand the problem in the first place.

Critical thinking is and always will be key. A thirst and desire to see patterns, to do the necessary investigation and research, and to develop the foresight to see how the linear lines come together unlocks understanding.

Our biggest challenge is what some researchers are describing as “popcorn brain.” Our ever-adapting behavior to consume short-form, overly concise content is going to be our most consequential challenge in solving problems the right way with sustained attention.

Our mantra is that, when devising strategies for new products and services, be mindful of the macro trends (e.g., population shifts) that are going to dramatically shape our future. Migrant workers may be a short-term solution for some organizations, but we need a sustainable long-term solution. The US has been built on the backs of millions of immigrants and continues to welcome documented individuals who seek our brand of democracy and freedom. With population shifts continuing to reframe our society, we simply want to remind everyone to study the trends and integrate that knowledge into foresight and future planning.

Interested in exploring more on these complex topics? Below is a list of prior newsletters to whet your appetite:

• Pattern Recognition
• Unintended Consequences of Indecision
• Falling Prey to Oversimplification
• Unintended Consequences Part 1