How to Waste a Crisis

The global financial crisis is reaching a bottom, and yet political frustration is growing, because the low point of the collapse seems to offer a last opportunity to promote dramatic change, and that opportunity may be missed. Last year, President Obama’s chief of staff Rahm Emanuel remarked that a good crisis should never be wasted. Disaster is an opportunity for thinking of ways to make the world fundamentally better – and also prevent future crises. People do a great deal of thinking, but sometimes they think so much that they come up with contradictory responses.

Indeed, what really makes a crisis profound is precisely the broad variety of differing diagnoses and different remedies. The political passions aroused by the clashes of interpretation often make the crisis seemingly insoluble. It was those conflicts, rather than some technical flaw in the operation of the economy, which made the Great Depression of the 1930’s such a dismal and destructive event.

Responses to a crisis fall into two categories. The first type aims at an institutional reordering, so that inefficiencies and perverse incentives are removed, and the economy functions more smoothly and efficiently. The second, more radical approach, tries to improve not the economy but the way people themselves go about their lives.

No institutional solution is purely neutral in its effects on relative incomes – and it is relative income and wealth around which political debate typically revolves. Bailout operations invariably bring bitter controversy because they help some but not others. Rescuing automobile producers looks good to their employees and suppliers. But the costs must be borne by everyone, including firms that are not rescued – probably because they operate more efficiently – and are put at a competitive disadvantage as a result.