Why Does the Worldwide Financial Crisis Fester So?

In today’s Journal, David Wessel nails it. (If you ask me, Wessel nails it consistently.) First, he asks the question that needs to be asked:

It has been two years since the flames were first spotted in Greece, yet the blaze still hasn’t been put out. Now it has spread to Italy.

It’s been five years since the U.S. housing bubble burst. Housing remains among the biggest reasons the U.S. economy is doing so poorly.

On both continents, there is no longer any doubt about the severity of the threat or the urgent need for better policies. Yet the players seem spectacularly unable to act.

What’s taking so long?

And then he offers a compelling answer:

Deciding who will get stuck with the tab.

“In every crisis, you have to allocate the losses between debtors, creditors and taxpayers,” says Anna Gelpern, an American University law professor and former Treasury official. “It’s a shockingly simple concept, and completely intractable.”

“By definition, it’s a political problem,” she adds. “Even if you came up with an optimal allocation, if it’s not politically salable, it can’t happen.”

Most people agree by now that our political structures are too incapable and/or impotent to a) responsibly address a crisis of this nature; and b) help create a framework that would prevent future crises.

To my mind, much of the trouble lies in how politicians’ incentives are badly misaligned: they are rewarded for short-term, self-interested activities (raising money, getting re-elected, coming down on the right side of short-term public opinion) while the goals the public really wants accomplished are long-term, public-interest works (which have almost nothing to do with raising money, electing politicians, or getting a good headline).

I have some inchoate ideas for how to address this incentive gap — to be framed out and written about here someday, hopefully — but I’m wondering what you all think of this politician-incentive problem and possible solutions to it?

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 74


  1. Al says:

    I have been saying this for more than 5 years. Politicians are in politics for themselves and the people who give them money. Short term fixes to get re-elected.

    It is all a shame, however, if you read Howard Zinn’s ‘A Peoples History’ you will see the system is actually working pretty much how the forefathers wanted it to be.

    Hot debate. What do you think? Thumb up 13 Thumb down 14
    • Mike B says:

      You forget that voters by and large WANT easy answers. It’s been mocked and satirized for decades. Europe has dealt with some of this by having a political class that is less accountable to voters, but that tends to only work when it comes to paying for long term investments. Also, back when media was more monolithic it was possible for the leadership class to sell sacrifice as an easy answer…but today there are a hundred pundits ready to jump on board with an even easier answer. This will only end once the public is ready to acknowledge reality.

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
  2. John King says:

    It is only part of the problem, albeit a large part. The “intractable” factor is that losses are necessary and we are watching politicians who absolutely refuse to consider alternatives to the current Keynesian scheme. They do it because it offers what they believe will mete out the least pain as well as save their own hides. They lack the courage to attempt alternative solutions – tax cuts and government austerity – even though history shows these have worked. The current policy only prolongs the pain over protracted periods and will end in tears anyway while risking hyperinflation, war or both.

    Hot debate. What do you think? Thumb up 29 Thumb down 28
    • Owen says:

      What historical examples are you referring to?

      Well-loved. Like or Dislike: Thumb up 8 Thumb down 3
      • Douglas Turner says:

        Hidden due to low comment rating. Click here to see.

        Disliked! Like or Dislike: Thumb up 2 Thumb down 25
      • Michael says:

        Maybe not everyone is as well read as you. Can you condescend to supply some examples? It is the internet so a copy-pasting should be all you need to do. Thanks, looking forward to it.

        Thumb up 2 Thumb down 0
  3. Leo Godin says:

    Since most in Congress are career politicians, they are always in campaign mode. That mode may ramp up or down depending on how close elections are, but they are always campaigning. I’d like to see eight year terms for the Senate, House, and Presidency, but limit eligibility to one term. I would also prevent anyone currently in Congress from running for President. This would have two main benefits.
    1) Once in office, they’d have eight years without campaigning. They could focus more on their legacy–which is more likely to result in public good–than their campaigns.
    2) With eight years in office, they’d be able to look at a 3-5 year plan and not be so concerned with public and donors opinions today.

    Well-loved. Like or Dislike: Thumb up 68 Thumb down 6
    • KL says:

      I like that idea and believe that the underlining principle, the fact that politicians campaign frequently, contributes to the short-sighted nature, especially in the House. However, by lengthening the time of service, you could also be decreasing the functionality of politicians, which is to represent their constituents. In an 8-year term, there is less incentive for politicians to stick to campaign promises during the first few years of the terms since voter memories are also short-sighted. This leaves only the latter part of the term as effective governing.

      I believe the solution may be capping number of terms in office at 2 (as we have with the presidency). This should place more incentive for politicians to focus on their legacy (which tends to have more of a long-term outlook on their performance) then their re-election.

      Well-loved. Like or Dislike: Thumb up 11 Thumb down 0
      • KL says:

        Alternatively, the government could issue financial options to politicians, similar to the stock options offered by companies. If a politician choose to partake in this program, he/she could purchase an option for a fixed price and the option would have an exercisable date years in the future. The value of the option would be determined by the sum total of GDP increase/decrease from the time the option is granted to the time the option is exercised. This would tie in the politicians’ financial objectives with that of the country’s.

        Thumb up 3 Thumb down 6
    • Ryan says:

      Let’s go with 6 years for President and Senate, staggered 3 apart so things don’t change all at once, and random selection every 2 years for the House, where one has to opt-in to the pool, which requires possessing a high school diploma or equivalent and passing a citizenship exam.

      Well-loved. Like or Dislike: Thumb up 7 Thumb down 2
    • Owen says:

      I disagree with term limits. To support them I would want to see hard evidence that term limited politicians are more effective than their alternatives. I don’t think this is true (but I’m not sure).

      I see two primary reasons for getting rid of term limits.

      1) The people most affected by term limits are good politicians. In order to believe in democracy one has to believe that with all other factors being the same (money, influence, etc) a bad politician will lose more often than a good one. That means the most likely candidates (with all other factors being the same) will be the ones most often reach term limits. The quick argument against this is that all other factors are not the same. I would agree but the solution is not to limit who can run for a position. It is to address the other factors, like how much money can be spent.

      2) The most productive politicians are experienced ones. Like any job, experience pays dividends. It is fundamental to the process that the politicians are around each other often enough to get to know one another and learn how to cooperate.

      Thumb up 6 Thumb down 4
      • Douglas Turner says:

        I would tend to agree with #2, except it seems to be the experienced politicians causing the problems. I think maybe we need the clueless about how Washington or [Fill in your states capitol].

        Thumb up 1 Thumb down 0
      • Enter your name... says:

        Also, term limits don’t result in career politicians getting a real job: they result in them running for a different office. So two terms in the California Assembly, two terms in the state senate, and then your choice of returning to the Assembly, running for the US House, or getting a state-wide office in the executive branch.

        So if the idea is “get rid of career politicians”, it’s a predictably hopeless failure. All we’re doing is making sure that the unelected office staff know far more about the job than the politician. (“Yes, Minister”, anyone?)

        Thumb up 2 Thumb down 1
    • uthor says:

      I like the idea, but see two problems with it. The first is that there’s a political machine in place and it takes some time to learn the ropes. With a one term limit, you are left with hundreds of congressmen who don’t know hwo to go about getting things done for a significant portionof their term.

      The second problem is that you have no record be which to judge a person by when it comes time to vote. Related to that, you have little option of removing someone who doesn’t work out as hoped. The two year term of someone in the House allows for the public to have control and judgement over how their representative acts.

      Thumb up 4 Thumb down 0
  4. David Collins says:

    While the political will to effect such a change is missing, the first two problems could be fixed (at least significantly reduced) by public campaign financing (with spending limits) and term limits for all political offices.

    Well-loved. Like or Dislike: Thumb up 17 Thumb down 4
  5. 164 says:

    My answer is that markets are out of equilibrium because prices freely move up, but are “sticky” on the way down. In other words property prices have come down a little, but not enough; wages have fallen a little but not enough to reflect market forces.

    Hot debate. What do you think? Thumb up 12 Thumb down 11
  6. Wake Up says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 25 Thumb down 30
    • Joshua Northey says:

      I like Ron Paul, spoken to him once or twice, and he makes a lot of good points. But a limited government isn’t the solution to all these problems. A better government is. I agree under the current system simply reducing the size of the government may be the best course of action, but there are a lot of important roles for the government in a well functioning society. I think fundamentalist libertarians tend to be a little naive about that.

      Government should absolutely be regulating pollution, enforcing robust zoning codes, making edicts about what people can and cannot eat. That is how you solve a lot of important collective action problems. But right now the government is a such a slave to two completely ineffectual parties that it is probably better to just reduce its power as much as possible.

      Well-loved. Like or Dislike: Thumb up 31 Thumb down 15
      • John B says:

        Did any of the people voting positive read what this person wrote? Government should absolutely be:

        ” enforcing robust zoning codes, making edicts about what people can and cannot eat. ”

        1. Robust zoning codes have caused much of the real estate problem, prevented buidling reasonably priced housing, racial segregation and created suburban sprawl. And helped NIMBY’s become NIMBY’s.

        2. The government should make edicts telling us what we can and cannot eat? To put it mildly, one of the least intelligent posts ever put on Freakonomics.

        Well-loved. Like or Dislike: Thumb up 12 Thumb down 2
    • caleb b says:

      I’ve always found it interesting that one political party thinks that government is horrible at choosing what wars to fight and how to combat terrorism, but can be great a deciding how to distribute tax dollars with health care and retirement. The other party thinks the government is terrible at distributing tax dollars for Health and SS, but great at choosing what wars to fight.

      Well-loved. Like or Dislike: Thumb up 17 Thumb down 4
      • twobeef says:

        I think your use of the word “great” is misplaced. One group of people believes that government should exist as an enforcer and little more. These people think that we should continue to have a powerful military and continually be a major part of foreign affairs, but that all other matters should be left up to the market. Despite the various externalities and market failures of private business, they find it easier to say that government is just inefficient at everything. It makes a better bumper sticker.

        Another group of people thinks that government should be a sort of defender of the people, that the government exists to fill in the gaps where private business fails. So they tend to ignore any of the gains to national wealth or invention brought on by major corporations and paint any CEO as a creature of evil. It’s less about what they actually believe and more that you just ignore and forget certain things when you need it to fit a narrative.

        But then, it’s really not about one political party or the other. President Obama told people on his way into office that he was going to add more troops to Afghanistan and would invade Pakistan to kill bin Laden if he was found there, and many registered Democrats supported him on that. For all the grumbling about inefficient government health care, I would be willing to be that most Republicans want social security and medicare to continue as they are because there’s more risk in dealing with private healthcare and investments. This is a war about words, not about actual ideologies.

        Well-loved. Like or Dislike: Thumb up 7 Thumb down 1
  7. Joe in Jersey says:

    Like many other things the solution lies in aligning the incentives of the politicians with what is good for the country. However is that really possible in that politicians have such short term concerns. Would the solution be to increase term length, but stagger the elections so that they still occur at the current pace. Still creating the proper incentives isn’t easy even when you thought it would be, look at CEO incentives and what a disaster that has been.

    Well-loved. Like or Dislike: Thumb up 6 Thumb down 0
  8. Jack says:

    Agree with the comments on term limits, and extending the length of terms — though disagree on how many terms and overall length. The downside of a single 8 year term is how to fire those doing a poor job, and how to “reward” those doing a good job.

    Additionally, a balanced budget amendment and a cap on federal budget growth (except in times of war/emergency) indexed to inflation (or something else meaningful) would force politicians to make hard decisions of allocation rather than just borrow more money or kick the can down the road.

    Well-loved. Like or Dislike: Thumb up 13 Thumb down 4
    • Nate says:

      Perhaps with a long length of term to kick out the those doing a poor job have a yes/no vote after four years on whether to continue or face a reelection but with a necessary yes vote at say 40%, obviously there is some incentive to cater to short term goals but it is reduced compared to the current system. The good guys should be able to get on with their jobs while only the atrociously bad should face the risk of being kicked out.

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
    • Joshua Northey says:

      You don’t need longer terms to help enforce longer time horizons if you simply make it impossible to ever serve a second time. It removes all the pernicious effects of angling for re-election. Of course you do then always have a group of neophytes.

      Thumb up 3 Thumb down 0
    • Leo Godin says:

      I thought about that as well. But since most presidents win re-election and most in Congress serve several terms, I figured that being able to fire them is almost irrelevant now. As far as rewarding the good ones, I thought about that as well. What if a tradition started for each member of Congress to take on a protege? If someone does a good job, and people like what they’ve done, they’ll elect that person’s protege. It’s not the typical reward, but it’s something.

      Thumb up 4 Thumb down 1
  9. Tim says:

    Leo Godin for President. That’s a fantastic proposal and eliminates the infernal struggle we witness so often between being effective and being re-elected.

    Thumb up 2 Thumb down 4
  10. Greg says:

    I have been saying for many years that the way around the short term, get re-elected focus to adopt a single term limit for all political offices, with terms extended somewhat from what they are today. The prohibition would be absolute – serve one term for any single level. After the term is over the individual could run for a different office. That means no campaigning while in office. Serve, go back to work, run again if you wish for a different office. An individual, at the Federal level, could potentially serve one term as a Representative, one term as a Senator, and one term as President. In between they would have to do something productive. Prohibit bouncing back and forth between elected, appointed and lobbying positions.

    Well-loved. Like or Dislike: Thumb up 15 Thumb down 3
    • Joshua Northey says:

      I think you might even want a 10 year enforced cooling off period before being able to run again.

      Thumb up 3 Thumb down 0
    • Leo Godin says:

      Great line ” In between they would have to do something productive.”

      Well-loved. Like or Dislike: Thumb up 8 Thumb down 0
    • Enter your name... says:

      Because it doesn’t work. A politician who is limited to one term in office “X” is going to spend that entire term campaigning — for his next job, in office “Y”.

      Also (and this may surprise you) being a politician is not a very easy or pleasant job, especially at the lower levels. It requires significant people-handling skills, a good memory for names and faces, and a willingness to be friendly to strangers who are blaming you for things completely outside of your control, being appallingly rude, or trying to “take you down a peg” because they decided that the half-correct quotation in last week’s newspaper showed you were getting a swelled head. You meet dozens of people a day, and all of them want something from you. You have to make sense of complex budget and personnel systems — systems that legislative staff members dedicate their whole careers to learning, and you need to pick it up overnight. You need to know arcane legislative processes, which committee is doing what, and how to use them to promote your goals.

      The fact is that we don’t actually have a long list of people who are more or less qualified AND willing to serve. (Like most Americans, I’m neither of these things.) If you declare “one elected office per lifetime” (the only way to prevent in-office campaigning), then you have to come up with at least ten times as many politicians as we have now — and you will end up with a US President who has never held any elected office at all.

      (I recommend reading the “National Busybodies” chapter of PJ O’Rourke’s Parliament of Whores.)

      Thumb up 4 Thumb down 1
  11. I fully agree. Without a long-term plan that is above politics, like the constitution is, there will be no solution. Politicians will continue to be in it for quick gains!

    Thumb up 3 Thumb down 0
  12. Joshua Northey says:

    This is a very complicated issue touching on a lot of things.

    Obsolete political technology:
    Our political technology is badly lagging behind our other technology. It is clear we could design more effective means of governance, but what interest is it of those who currently sit on top to shake things up?

    The political structures in the US are badly broken. You have two parties who pretty much dominate everything regarding the political process, neither of which is remotely interested in good governance. As organizations they want more power and the ability to service the interests of their donors, personally they chase re-election and post-political employment. That is it. No where on that list does what is good for the country appear expect as a tertiary concern.

    When was the last time any decision was made by congress or the top levels of the executive branch that had a time horizon over 2 years? Heck over 6 months is pretty rare. Meanwhile with life expectancy continuously rising and generational diversity we should be making almost all decision with a 25 or 50 year time horizon, if not longer.

    I always think it is laughable when people try to invoke “the founders” on issues, but in this case I think we can know one thing about what “the founders” would think.

    “The founders” would think it was absolutely insane that we were trying to run the country under a set of rules written when it had 1/200th the population, 1/20th? the area, a completely different economic system, a tiny pittance of its current GDP, a military that would today lose to police force of a small city, little to no real foreign policy entanglements. On top of that our means of sharing and disseminating information has completely changed, the power an availability of travel has completely changed, the destructive capacity of weapons is orders of magnitude different. You could go on and on.

    It is just a joke. We are long long long overdue for a new constitutional convention. We are running “US government version 2.223″ instead of “US government 10.20″ and frankly the hacks and workarounds are not cutting it anymore. Unfortunately who knows how much a constitutional convention would even fix anymore, because you would almost certainly just have the current politicians running it…so the result would be more of the same but worse.

    Institutional Sclerosis:
    Other than the civil war the US hasn’t really had anything bad happen to it (on historical scales 9/11 is a freaking mosquito bite). It hasn’t been forced to improve. When the system is more or less the same for so long you end up having those institutions which are most able to gobble up power and favors benefiting disproportionately. This leads to further entrenchment and growth until eventually they are impossible to dislodge and you have this kind of institutional sclerosis. Look at the complete disconnect between our military needs after 1944 and our military spending. The beast simply has a life of its own completely separate from what is best for the nation as a whole.

    So now we have a system where the strongest institutions always make sure none of their oxes are ever gored and thus you never have effective solutions (e.g. the healthcare debate).

    This is why the Democrats failed so badly. They said “lets reform healthcare but not ask any of the current players to make any real sacrifices”. No sacrifices for the big insurers, no sacrifices for patients, no sacrifices for doctors, no sacrifices for pharma. Well when that is your plan of course it is going to fail. It is impossible to have true reform without goring some oxes.

    This political stagnation is only going to increase in an era where war is decreasingly prevalent. 500 years ago a country as dysfunctional as Greece would simply be overtaken by a neighbor, and the Greek populace forced to face economic reality that way. These days it can just limp along off borrowing. Postponing the day of reckoning.

    Obviously wars are not a good solution with modern weapons technology, but we do need a way for dysfunctional ruling classes/populaces to be forced to face reality…

    Radical ideas:
    Governing the a country the size of the US is a really really important job. In fact probably the most important set of jobs ever. Yet we don’t take selection for the positions seriously at all. Even on a local level the quality of people in political positions is pretty laughable compared to the importance of the decisions they will be making. On the national level it is absurd.

    1) US Department of HR:
    Lets say that being President was just a position in a company and everyone in the US had to fill out an application, would George Bush II have been among the top 100,000 candidates? Top million? Nothing about the man or his past would lead one to think he was remotely qualified, yet he got it. Talk about a broken process.

    Maybe there should be some sort of government HR branch, you could still have elections, but they could be elections among approved candidates? Sort of like the Supreme Court except for recruitment.

    2) Branch of facts/honesty
    Science has come along way since the 1770s. It is passed time we have a branch of government that is responsible for making sure that the government is run sensibly. You could make it a requirement that legislation had to make specific claims about impacts and goals. The in addition to a law being struck down for being unconstitutional, it could be struck down for being factually incorrect. Obviously such rulings would be controversial, but so is the SC.

    3) Being a congress person is really important, act like it
    Here is a starter, congress is a little like serving on a nuclear submarine, or on a jury. If you are elected you are put in a secluded location and sequestered for your term. No meetings with constituents, no meetings with lobbyists. You sit in a isolated location and work out problems. Perhaps even have it so communication can come in, but communication cannot go out. Then when the term is up (say a couple months), you have a slate of legislation. Then the next group of people gets sequestered.

    Anyway just some crazy ideas. Of course none of them will happen. We will continue on our slow slide toward complete dysfunction.

    Well-loved. Like or Dislike: Thumb up 19 Thumb down 2
    • Quentin says:

      Regarding an organization with the power to approve candidates for office, it sounds nice until you look at where it has been tried before. In Iran, they have a constitutional republic, but a committee gets to determine the suitability of candidates, which has the effect of creating a one party system.

      Well-loved. Like or Dislike: Thumb up 12 Thumb down 0
  13. Noah says:

    An amusing solution: Remove most of the short-term incentives by choosing political candidates randomly via a lottery, rather like we recruit jurors. Then in the popular election each candidate is individually subject to an approval vote.

    Thumb up 4 Thumb down 2
  14. Kim says:

    Create truly competitive election districts, rather than allow parties to gerrymander the process every 10 years. When you have a district that is even just slightly (more than a 48-52 split) weighted in one direction, it’s too easy to get the dominant party elected. If you have truly competitive districts, you have to have higher-quality candidates, because they have an actual fight on their hands. My brother is a political consultant, and as he says, there are districts where they are so heavily in favor of his party that he could get a cat elected over anyone else.

    Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
  15. vinita says:

    Read Hind Swaraj for what Mahatma Gandhi had to say on this.

    Thumb up 1 Thumb down 3
  16. Shane says:

    Yet we are seeing some pretty severe austerity budgets in various countries. So this suggests that an alarmed electorate can be persuaded to make sacrifices if they feel it is in the country’s interest.

    Here in Ireland the main party who was in power before and during the crisis began austerity budgets and was destroyed in the general election, but the parties who replaced them were also promising severe budget cuts and tax hikes. There have been no riots and only a few minor protests, because most people think that this is necessary. So long as the governing parties can convince people that sacrifices are necessary, people will give them a mandate to make risky but necessary cuts.

    So I wouldn’t give up on the political system just yet! Estonia is another interesting example, pushing through an austerity budget of 9% in 2009. They seem to have bounced back well, growing 8.4% in the second quarter of 2011.

    (I’m not saying that austerity budgets are necessarily the smartest way to deal with things. But perhaps it shows that governments can take unpopular measures, and have widespread support, if they convince the public that it is necessary.)

    Thumb up 4 Thumb down 0
  17. Oleg says:

    What we need is a different way to rank politicians. There is a software tool for fighting vandalism on Wikipedia, where anyone can come in and make any edit to pretty much any article. The tool works by assigning reputations to editors, and the reputation is based on how long their edit survives. Edits that add value tend to remain, while bad ones get replaced quickly.

    We should do the same for politicians: rate them on how long the measures that they propose and vote for survive. If this rating gets widely accepted, politicians would carefully consider their actions and aim for long-term effects.

    This is a purely tongue-in-cheek suggestion, but they say in every joke there is a grain of truth.

    Thumb up 4 Thumb down 1
  18. J says:

    I think you have to admit part of the reason why political incentives are focused on the short term results is because the people that elect them also have a short term focus. Most of the anger people are venting about is how to fix these problems, and fix them now. If we put a politician in office for the next 10 years and he/she made a plan to work out the situation in that time frame, and things were worse five years out… it wouldn’t matter what the laws was; that person would be dragged out into the streets.

    The problem is everyone has a different threshold for “the short-term”, and it’s incredibly difficult to have people determine, even for themselves, the difference between what they want and what they need.

    Thumb up 1 Thumb down 0
  19. Gary says:

    I can solve two of the three incentives (money, reelection, ego):

    1. Stop funding individual politicians and fund the election process. This separates the lobbyists from those whose votes they buy. When donor/lobbyists fund the process, all certified candidates are financed equally (certification needs to be figured out, but it’s not unresolvable) . The best at managing their allotment and message probably will win and what we need are good managers. Donor/lobbyists get some influence but it’s diluted. This idea doesn’t require public funding, either.

    2. Term limits. Plain and simple – you can’t make politics a career because your interests are narrow while the public’s are broad.

    3. As for ego. Well, just maybe if the first two ideas work, politics won’t attract so many narcisistic jerks.

    Thumb up 4 Thumb down 2
  20. David Leppik says:

    I don’t think it’s a matter of having a better political system. The fundamental question is who gets the short end of the stick. At some point, certain voters will be winners and certain voters will be losers. The only thing an ideal democratic process could accomplish is to provide that there will be more winners than losers…

    …and that’s assuming that the winners get to vote. In both Greece and the US, the crisis was caused when voters were getting huge value by borrowing unsustainably, and the winners were “us, then” and the losers are “us, now.”

    That said, we’re far from a perfect democratic process, given that the main winners have been the 1%, and continue to be.

    Thumb up 0 Thumb down 2
  21. Eric M. Jones. says:

    When FDR faced the last depression, he saw that the problem was that people (except the rich) had no wealth and no income. So he created a variety of programs like the CCC, WPA, AAA to inject wealth back into circulation. Of course the Republicans, then as now, were utterly opposed to it. FDR taxed the wealthy heavily (94%!) to support the social programs.

    http://en.wikipedia.org/wiki/Franklin_D._Roosevelt#First_term.2C_1933.E2.80.931937

    After WWII, the top marginal tax rate declined through successive administrations to the point where the government now BORROWS its operating capital from the rich.

    High marginal tax rates are not bad. Remember that deductions were the means used to get the rich to invest instead of spend on luxuries.

    Of course, the Democrats, then as now, were utterly confused, but FDR kicked butt, took up the challenge and vilified the rich to get the job done. Too bad President “No Drama” Obama is such a nice guy in a time when serious ass-kicking and arm-twisting is needed.

    I see no short-term hope.

    Thumb up 8 Thumb down 7
  22. Becky says:

    It’s the PEOPLE who elect the politicians who are the problem. As long as THEY are more interested in short-term gain, or getting “benefits” that they didn’t pay for. . . they will keep electing politicians who give them what they want.

    If you hit your thumb with a hammer, do you blame the hammer?

    Thumb up 3 Thumb down 2
  23. Basil White says:

    How small do we need to make government before banks stop collecting insurance claims on writing their own bad mortgage loans and bailing the loans out with taxpayer money?

    Thumb up 2 Thumb down 2
  24. Thomas says:

    Some observations from Europe: The US has unfortunately a 2 party system. Imagine a commodity with only 2 suppliers.
    Democrats & Republicans have settled in the left and right corners and don’t face any competition there. If you are left you vote Democrats, if you are conservative yo uvote republicans. It’s not a free market…

    Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
  25. Jason says:

    There is a lot of support for term limits here, and I was in agreement until I moved to California. Our term limits have created an Assembly full of two types – 1) Neophytes with minimal understanding of process or negotiation; 2) Idealogues with no incentive to break their promises in order to get something done. (Most are both.) This seems to point to two alternatives.

    One is a strong party system. There are parliamentary systems where a few people make all of the decisions and everyone else falls in line. There are also “smoke-filled room” systems, which is what California had under Willie Brown. Different structure, same result. Stuff gets done, but not too democratic.

    The other is what Kim proposes above – actually competitive districts. Not sure how to make this happen in an era where we have so much information that allows us to predict how people will vote – do we just gerrymander until every district is 50/50? If every district were competitive, would it lessen the amount of money available – harder to finance hundreds of races instead of just a targeted few?

    Not sure how to make it happen, but hopefully we can make progress in that direction soon!

    Thumb up 2 Thumb down 0
  26. Travis says:

    I think you should consider working with Lawrence Lessig on the whole issue of politic and incentives. Or at least thinking about his recent work.

    Thumb up 0 Thumb down 0
  27. Todd Batt says:

    What’s not to love about this idea right?

    It sounds like a snide remark, but until we find someone that has the personal magnetism like a Reagan, Kennedy, Clinton or Obama to shepherd ideas from candidates like.. Paul, Cain, McCain etc (pick your fave)… it’s going to be very very hard to sell the swallowing of the jagged pill that will be necessary to recalibrate the switch from short term focus to longer term. Someone to sell the idea that maybe it isn’t wise to retro-fit an economy to facilitate everyone owning a 5k sq ft house as an economic litmus test of success.

    At some point, someone tells you that you need to lose weight through hard work and you decide to go through the pain. Nobody likes to admit that that tipping point is a decision normally made very superficially, but it you think about it.. we all do it. We are waiting for a person to rally around. When they have crazy hair and don’t stay calm (regardless of the real content of their idea)… we discount them. Ron Paul, Howard Dean, Rick Perry whoever…

    And with the idea attached as well. It’s going to take one prominent person to usher in a change like that for congress.

    Thumb up 0 Thumb down 0
  28. Andy Daly says:

    I could not agree more with this, however longer terms are not the answer. Any faith in politicians working with all of the public’s best interests at hear has been seriously eroded on a number of fronts (fundamentally in the UK by the expenses and phone hacking scandals). Despite the rhetoric of “we know what is like for the average person” most do not have clue – take one leading MP recently whose wife stated in a national paper that £130 was a “reasonable price” for a haircut.
    We need a solution that genuinely looks at the best interests of all, not merely the 23% of the voting population it takes in the UK to get you into power. A system that relies on research and evidence based improvement and policy development rather than populist recycled rhetoric by individuals with no specialist expertise or in depth understanding of the field they fumbling with.
    I would potentially suggest a system that does not have a ruling party but voters would elect representatives proportionally and then these independent representatives would have to work collaboratively to agree policy cross party.

    Thumb up 0 Thumb down 0
  29. DaveyNC says:

    I realize that this is tantamount to heresy, but here is what should have happened on that day back in 2007 when Bernanke and Paulson went to the President to brief him. Bush should have:

    1. Summoned the CEO’s of the various problem banks; Goldman, Wachovia, Bank of America and so on, to a meeting in his office. He should have instructed them to bring a box of their letterhead.

    2. He should have had each of them dictate their resignation letters and then sign them.

    3. He should have then announced the issues that had developed and that the US would backstop all of the problem banks and begin to unwind the mess, as was done with AIG. In other words, take them over. Don’t bail them out, just backstop them in case of collapse. Enforce an orderly dissolution. Break them up and wind them down.

    4. Summoned Paulson to his office and demanded his resignation, since much of this happened on his watch at Goldman.

    This would have made sure that some damn body paid for this mess, if only in the loss of their jobs and prestige and would have reassured the markets that the US would not allow a disorderly collapse. This would still have taken years to unwind, but maybe we could have avoided this death by a thousand cuts that we are enduring now.

    Thumb up 3 Thumb down 0
  30. twobeef says:

    “To my mind, much of the trouble lies in how politicians’ incentives are badly misaligned: they are rewarded for short-term, self-interested activities (raising money, getting re-elected, coming down on the right side of short-term public opinion) while the goals the public really wants accomplished are long-term, public-interest works (which have almost nothing to do with raising money, electing politicians, or getting a good headline).”

    Rewards for short-term, self-interested activities instead of long-term, public interest? Isn’t that the exact same corporate mindset that caused the housing bubble in the first place?

    Thumb up 1 Thumb down 0
  31. JonE says:

    I feel like the solution is really rather simple, and I apologize if someone else has already commented with this idea (I didn’t read all the previous posts). Eliminate “career politicians.” this, in my mind was an oversight in the Constitution. We remedied the problem with regard to presidents, but for some reason, we have yet to do so with the rest of them.

    By eliminating the continued prospects of reelection (and thus pandering to constituent whims), a politician would be able to make what they perceive to be the “right” decision.

    Thumb up 2 Thumb down 0
  32. Hugh says:

    futarchy

    Thumb up 0 Thumb down 1
  33. RZ says:

    I think part of the problem is that “the powers that be” try to solve the problem, not by solving the root cause of it, but by feeding the cause. Take the U.S. housing crisis. A big part of the issue is that housing prices rose too high too quickly. Rather than allow housing prices to correct, government is doing everything it can to prop up the inflated prices in hope that will solve the economic problems. They don’t take into account that this may help assuage some of the problem in the short-term but is not going to help in the long-term because it prices out the middle class. In other words, a whole segment of society who would be consumers in this area will not be because the price is too high.

    Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
  34. Joe says:

    Well to stay on task it is true it is a political problem. When the European Union started. Socialism has always failed, especially when it’s forced on them. All these small countries were bullied in to joining and now can’t pay their bills. They didn’t have these issues before the EU, but now it effects the whole world.

    Thumb up 1 Thumb down 0
  35. Carl Franklin says:

    The big simple problem is this. No matter what fix anyone comes up with, it will take the politicians themselves to make it law. Nobody in power has an incentive to take their own power away. That’s why history is littered with revolutions.

    Thumb up 2 Thumb down 0
  36. Owen says:

    It’s curious to me that the arc of history suggests that making people more accountable has improved many societies, yet this entire thread is debating better ways to make people less accountable.

    The problem is not that politicians give people what they want. The problem is that people want the wrong things. This is why advocacy and education is so important.

    Thumb up 0 Thumb down 0
  37. mannyvel says:

    In regards to the housing problem here in the US, the obvious question is: why should the government do anything else?

    The government is already backstopping the industry with Fannie and Freddie and basically keeping the mortgage market alive. They’ve ensured the continued functioning of the financial system by providing liquidity and being the buyer of last resort. Should the government really do anything about the soft real estate market?

    When the financial system collapses, everybody loses. That’s a scenario that the government can deal with, because it’s the only time when all the appropriate constituents will put their differences aside. And in the case of the bailouts, it’s unclear whether the government cared enough about getting screwed in the deal. Like most government officials not in law enforcement, it’s hard to imagine that in a life-or-death situation an actor would play for their own gain.

    Anyway, in this situation the ones that lose are the ones who don’t have a seat at the table: the public. Look what happened to GM, Chrysler, and the bank bailouts: the unions won, the workers won, the banks won, the shareholders won. The taxpayers got short shrift.

    They’ll work something like that out in the EU as well.

    Thumb up 0 Thumb down 0
  38. mfw13 says:

    Reforming political structures and processes is great in theory…but not so easy to do in reality.

    Just about every change being suggested would require both a Consitutional Amendment AND politicians to act against their own self-interests (since any Constitutional Amendment requires confirmation by state legislatures).

    Not gonna happen, unfortunately…

    Thumb up 1 Thumb down 0
    • Joe J says:

      mfw13, Actually, it is easier than most realise, but in an all or nothing kind of way. Instead of going through the long process of Amending the Constitution, you can bypass it by holding a Constitutional Convention, as was done when we threw out the Articles of Confederation and wrote the Constitution. It completely bypasses the Federal government, and is done by brand new delegates from the states.

      Thumb up 0 Thumb down 0
  39. Joe J says:

    I don’t see the guaranteed benifits people here are claiming would result from term limits. I see equally as likely to happen, I just got elected and know no matter how bad I do my job, I have my job for X years and no matter how good I do my job, I can’t have it for more than the same X years. My incentive to do good is now nonexistant. While with often elections there is the chance that if I do perform badly, it might get me replaced.

    What I believe would be much more benificial wwould be to completely eliminate political parties. And have each candidate run on their own merits.
    Why would this be better.
    I see candidates have, several semi conflicting loyalties.
    1. Loyalty to their own personal greed, and ego.
    2. Loyalty to doing a good job for their constituants.
    3. Loyalty to the advancement of their political party.

    Eliminating the political party loyalty would increase the loyalty to the first two. An increase in #1 would make the bad politicians easier to spot and get rid of. and an increade in #2 would cause them to be a better elected official.

    Thumb up 1 Thumb down 0
  40. txdave22 says:

    Solutions would come faster if it were not for recalcitrance of GOP, who can obstruct but are not good at constructing anything.

    Bill Clinton’s small tax hike on the rich in the ‘Deficit Cutting Act of 1993′ brought

    on years of job growth, prosperity, and enabled him to hand a surplus to silly gw

    bush, whose fiscally unsound, but typical, pub reign of error forced him to hand a

    trillion dollar deficit to President Obama. He is hard at work for the American

    people to increase jobs and turn the deficit around, but needs a little bit of help

    from the rich.

    Cost of Tax Cuts for the Wealthiest Americans Since 2001

    Cost of Tax Cuts for Top 1%$709,080,010,992

    Cost of Tax Cuts for Next 4%$326,761,655,396

    Money lost to the U.S. Treasury due to tax cuts for the wealthiest Americans.

    If the government didn’t have the richest Americans on the dole, we could solve the housing problems and have hjgh speed trains like Japan and EU, better roads and infrastructure.

    But, GOP beholden to rich for contributions to stay in office and status quo theology prevent the progress you see in other countries.

    Has the GOP ever been successful? Not with bush 2 stock market crash, 2 recessions, and huge financial crisis. Reagan/bush—3 recessions, stock market crash, iran/contra (reagan’s highest security advisors convicted. Let’s not even go back to nixon/ford and that terrible stock market or herbert hoover.

    Why do more people not look at these obvious facts and vote for success? Possibly greed, ignorance, certainly the devotion of religious right to overturn of roe and preventing as much gay marriage as they can.

    Gay marriage is great for business wherever it’s legal, as gays have big money. Even a reversal of roe will not get rid of abortion, it would be a lot like prohibition when rich could always get booze and with eht black market the rich got richer.

    Thumb up 1 Thumb down 1
  41. Joss Delage says:

    I’d like elected politicians (mostly lawmakers) to be paid with 20 yr “shares” indexed on economic value created in the US. These shares would be transferable at the death of the politician to their inheritors. The shares would be structured so as to make any elected politician very wealthy (say $50M) as long as the economy grows reasonably. (This is to remove most corruption incentives.) They could become even wealthier if they really work on creating an ideal environment for prosperity.

    Thumb up 1 Thumb down 0
  42. KevinB says:

    For starters, the US could look northward for a few minutes. About 10 years ago, we completely revamped our political campaign finance laws at the federal level. Unions and corporations were completely banned from making any contributions. Individuals were limited to $1,000 annually (that figure rises with inflation; it’s $1,100 now) which could go to an individual candidate or the party at large or any combination of the two. All donations over $20 had to be by cheque (i.e. no bags of cash under the table). In return, each party gets an annual subsidy from the federal government, about $1.65 per vote it received in the previous election. There are strict limits on how much money can be spent in total for a campaign. 3rd parties can advertise as well, but there are limits on which they can spend.

    The result is our federal government, at least, isn’t beholden to special interests (not so true at the provincial level, as Ontario’s recent election proved out). When the financial crisis hit, there wasn’t a need to act as drastically as there was in the US (I’m not going to comment on what was done by both Bush and Obama, although I think they both were wrong). Instead, our government stepped back, and came up with a prudent, limited stimulus (about 3% of what the US spent, in an economy more than 1/10th the size), and they are already looking to a federal surplus in three years. Since you are our largest trading partner, obviously, we’re affected by what happens to you, so we’re looking at lower growth, but at least we’re looking at growth. Already, more people are working in Canada than there were before the crisis hit.

    Now, because of your 1st amendment, it would take a constitutional amendment to change the existing rules, so I’m not suggesting this would be easy or quick. I am suggesting it would be the right thing to do.

    Thumb up 1 Thumb down 0
  43. Allan Lewis says:

    Generally, “we the people” – as a group – want politicians (and leaders in general) to find the optimal solutions to the problems of socety. However, “we the people” as individuals generally reject any solution that makes us individually worse off. Why? First of all the problems of society are often too complex for the solutions to be understood by most persons. We know from empirical evidence how cognitive biases adversely affect effective decision making. For example, we know from behavioural economics that most persons consider problems mostly through the lens of their own personal experiences. As a result, from the point of view of the individual, the optimal solution is often perceived as the one that makes the individual better off (or at least no worse off).

    Also consider that the “problems of society” often have no obvious optimal solution because human behaviour is so dominant when implementing solutions to such problems and we know the difficulty in predicting the behaviour of large groups of persons. . In the ensuing debate the persons with most power and influence are able to get their views disproportionately accepted by politicians and other leaders

    So even if one assumes that all politicians are honest and intend to do what is best for “we the people” how do we now with some degree of certainty which is the optimal solution from among a given set of possible solutions?

    The current discourse between the the Obama administration and Republican majority in Congress seems to me to be a perfect example: Each thinks that their views on how to reduce the deficit are optimal.

    So I believe the problem is impossible to solve (I hope I am proven wrong).

    Thumb up 0 Thumb down 0
  44. Sarah says:

    Levitt for Pres!

    Thumb up 0 Thumb down 0
  45. gregh says:

    Short term politics can be solved by doing two things.
    1. Make campaign money available equally to all candidates from public taxes.
    2. Make term limits for long terms. ie, 8 years for a senator.
    This will take the graft out of campaing contributions, and a politician will only have one shot at posterity.
    gh

    Thumb up 1 Thumb down 0
  46. Matt says:

    I propose (somewhat sarcastically) that we follow the example of Silicon Valley and use equity to properly incentivize our politicians. We should base their pension on some metric that combines measures of the country’s economic output, unemployment rate, and income distribution. And we should make the potential payoffs from the pension much, much larger than any payoff they could earn as lobbyist/partisan political activist (e.g. let former congressman/senators/etc take 1% of GDP–maybe more??–for their pensions. We should able to afford it if it leads to a higher compounded growth rate for GDP).

    …probably wouldn’t work, but still fun to think about…

    Thumb up 0 Thumb down 0
  47. Tarik says:

    The elimination of fractional reserve banking and interest based transactions would address the core issues themselves, taking after-the-fact resolution needs out of the hands of politicians.

    Thumb up 0 Thumb down 0
  48. Atsudo Nym says:

    I think that the political class of both Europe and America are representing their constituents quite well. Indeed, that is the problem.

    Their constituents are, as a statistical group, ill informed, self deluding, intellectually lazy and guided by their own shallow perception of short term self interest. The political class has evolved in a classic Darwinian way to serve these motivations, exploit them and perpetuate them. Picture one of those viruses that infect a rat’s brain and make it behave in ways that make it more susceptible to predation by cats. The virus can survive equally well in either the rat or the cat. Its a really elegant, marvelously effective survival strategy.

    In the terms of the “Occupy” movement, the cats are the “1 percent” and the rats are the other 99.

    Jimmy Carter inadvertently summed it up in his first campaign. He said he wanted to give America the government it deserved. His predecessors already had, and his successors continue to do so.

    Thumb up 0 Thumb down 1
  49. dave says:

    There seems to be not just opposition to ideas, but real hate on the part of the ‘christian’ (supposedly) repubs for the President.

    He is the elected leader of the US, has not sent soldiers off to die in a war of choice like bush, has not caused a financial crash like bush.

    Where does this hate that pubs simply radiate, where does that come from? I don’t think Jesus would approve, as he preached love your neighbor and do unto others. I don’t see much of that, if any in GOP.
    So many republicans call themselves christian and followers of the bible, but once again their hypocrisy and lack of christian love allow themselves to express themselves like low-class rednecks.

    What happened to ‘love your neighbor’ and ‘do unto others’ in the view of these supposedly ‘christian’ republicans?

    Also, pubs used to believe in liberty and personal freedom, but now pub candidates are required to sign pledges to deprive a woman of liberty in choosing whether or not she carries a fetus to term. Also, they insist candidates stand in the way of personal freedom for gay taxpayers.

    They also ‘talk’ but do not do when it comes to debt and deficits. Clinton gave the U.S. a surplus, but reagan/bush drove the debt and deficits up, and george w bush exploded the debt/deficit taking Clinton’s surplus in 2001 and handing Obama a trillion dollar deficit in 2009.

    Character, class and common sense would seem to be lacking in many pubs, maybe nascar pubs too.

    Thumb up 1 Thumb down 0
  50. Jason says:

    Damn you, Dubner! If I wanted to think for myself I’d turn on the television! Get on that framing and writing!

    Thumb up 0 Thumb down 0