In the book, we tackle the big question whether crisis is necesary or sufficient for significant reform. Many people seem to think so, including Milton Friedman and Chicago’s Mayor Rahm Emanuel. As we write in chapter 1, political entrepreneurs can often be seen attempting to building the perception of a crisis:
If you listen to politicians and pundits enough, crises both real and imagined will become exceedingly common. That’s because madmen in authority are expected to act in response to a crisis, and the bigger the crisis the bigger the change expected—or allowed.
(Madmen, Chapter 1, p.7)
To wit, a business association named the Commercial Club of Chicago has recently issued a forecast of the state’s public employee pension system, arguing that liabilities are growing without controls and the system has become “unfixable”. Why is a business association worked up about pension liabilities? Because without reform, the price tag is set to land in the laps of taxpayers.
The Club is promoting reforms that limit the state’s liabilities, including an end to cost-of-living adjustments, a cap on base salaries used to calculate pension benefits, an increase in retirement age, and shifting costs of education employees’ pensions to school boards.
These measures have serious teeth to them. Just ask Stanford finance professor Joshua Rauh, interviewed by Russ Roberts here on Econ Talk. (In short, because pension funds assume an 8% annual return, they are far more underfunded than most people think. The 50-states combined liability is not $1 trillion but more like $4 trillion. Just ending COLA’s would trim that by up to 40%).
Political change happens when circumstances lend themselves to entrepreneurship that exploits emerging fissures in the structure of ideas, institutions, and incentives. Often a crisis situation (or what Acemoglu and Robinson in Why Nations Fail call a “critical juncture”) actually does create those reform-ripe circumstances. Which is why we so frequently see politicians and pundits working very hard to create a perception of crisis, whether or not a real one lies beneath.
But as we argue in the book, crisis is actually neither necessary nor sufficient for political change. This will be another blog post forthcoming in the next day or two.