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?

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  1. 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.

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  2. 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.

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    • Joshua Northey says:

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

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    • Leo Godin says:

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

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    • 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.)

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  3. 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!

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  4. 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.

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    • 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.

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  5. 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.

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  6. 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.

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  7. vinita says:

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

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  8. 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.)

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