Will It Take a Crisis?

In a new paper released by The Pew Charitable Trusts, George Mason University Professor (and Peterson-Pew Commission consultant) Paul Posner addresses the question "Will It Take a Crisis?".

The fiscal challenges over the medium and long-term for the U.S. have heightened the importance of early action on controlling future deficits. However, making difficult fiscal decisions in a heavily polarized climate presents many risks to politicians when they would be of great benefit to the broader public. So are policymakers up to the task of tackling these challenges, or will it take a crisis?

The Barriers to Action

After clearly presenting the magnitude of our fiscal woes, Posner discusses the incentives and bottlenecks than can thwart thoughtful action and foresight to control rising debt. Some argue that government has the incentives and abilities to increase budgets (known as public choice theory) and that elections force politicians to be near-sighted, putting off difficult decisions until a crisis forces changes. But key stakeholders in society can and do mobilize against policy changes that would affect them (interest group bias)--and have a greater interest in mobilizing than society at large who would stand to benefit.

Our political process can also work to stymie major change, with the system of checks and balances instituting many "veto points" throughout the policymaking process. Additionally, members of Congress and presidents spend an increasing amount of time focusing on fundraising, elections, and things that are urgent but potentially not most important--and perhaps less time crafting policy solutions to future problems.

As Posner states:

"Notwithstanding the overwhelming advantages of early action on fiscal challenges, the conventional view of many of our most sophisticated commentators is that it will take a crisis before we collectively come to grips with the hard choices that need to be made on the spending and tax sides of the budget. In this view, foresight is a politically unnatural act by elected officials who primarily focus on their next election far more than they do the fiscal prospects facing the nation 20 years from now."

"As contrasted with conventional wisdom and certain academic literatures, democratic nations are not doomed to be reactive to market pressures alone. Rather, the record shows that policy makers and publics alike can be summoned to fiscal sacrifice and longer-term vision by compelling ideas presented in ways designed to mobilize broader publics traditionally unengaged in budget decision-making. Elected leaders at times are rewarded by publics that are persuaded to view sacrifices as necessary for the broader public good."

How Action in Advance Can Happen

Political history in both the U.S. and abroad shows that politicians can use the "language of a crisis to create a compelling case for action now." There have been 14 episodes in advanced economies over the past 30 years (and 26 emerging economies) where countries achieved fiscal improvements of over seven percent points of GDP, many of which without relying on a fiscal crisis to force change.

Overall, Posner argues that there are three forces that promote agreement:

• Political opportunities - Leaders can be anxious to claim credit for fiscal progress.
• Economic goals and risks - Policymakers are held accountable for the state of the economy and future outlook.
• Broader policy goals - Whether for reducing the size of government or creating the fiscal space for future priorities, deficit reduction can serve several goals.

Interestingly, over periods of fiscal progress in the 1980s and 1990s, a divided government prevailed. This gets to the key to Posner's argument that bipartisan agreement can offer the best chance of success in both enacting and sustaining fiscal reforms, and that bipartisan cooperation offers the political cover needed for each side to embrace reform.

With policymakers increasingly focusing on solutions to rising deficits and debt, there is no better time than the present to start work on a comprehensive fiscal plan. Paul's analysis certainly presents the reasons to be optimistic about our ability to change course, but it's up to lawmakers to show the leadership we need.