The Crisis Next Time

We pay a high price when we depend upon a crisis to catalyze action to solve major problems.
by | October 22, 2008
 

It is difficult to write about anything these days that does not touch on the current financial crisis gripping the nation. It has paralyzed credit markets and infected stock markets, and is beginning to have a broader impact on Main Street businesses as well as state and local governments.

As we try to adjust to the realities of the current financial crisis, it is worth pondering what crises mean for our system. A recent report by NYU's Professor Paul Light and its Center for Catastrophe Preparedness and Response usefully delineates what they call "sudden crises" and "smoldering crises" -- each with very different implications for decision-making and management.

Sudden crises are unexpected events that organizations have virtually no control over or responsibility for, such as a devastating earthquake or terrorist attack. These are what might be called low probability, high-impact events. And, while they may be foreseen by some, such events are unanticipated by most.

Smoldering crises, on the other hand, start out as diffuse problems. These problems are well known but never receive attention until they reach crisis stage. Crises such as the meltdown of Wall Street this year, or the collapse of New York City's finances in 1975, are characteristic of smoldering problems whose dimensions were understood to be unsustainable and that should have been addressed earlier on a large-scale. However, the considerable political and economic costs of dealing with the underlying problems were simply too daunting and nothing was done to mitigate or prevent the subsequent economic and social dislocation.

Some make a virtue out of necessity by arguing that crises are the only way our system can make tough policy choices. Applying this logic to Social Security or global warming implies that the nation will not come to grips with simmering or smoldering problems until the proverbial wolf is banging down the door.

Let's hope this is not our collective fate, since all of us pay a high price in waiting for a crisis to solve major problems. First, as the current financial crisis shows, decision-makers often do not have the information necessary to make good decisions in the crucible of fire during a crisis. For instance, in September, the Treasury quickly responded to the threats to money market funds -- prompted by the collapse of Lehman Brothers -- by extending federal guarantees to all investors in these funds. But, only days later, the Treasury had to retrace its steps when advised that such a policy would create a stampede from bank accounts with lower interest rates.

Second, the changes and disruption necessitated by a problem are typically far more precipitous and severe when we wait for a crisis to develop. Early intervention allows us to handle the problem in more manageable, incremental stages. For instance, Social Security and global warming will both exact a far higher toll if we wait until these problems reach the crisis phase. Among other benefits, early action provides time for affected populations to adapt to the eventual change by making adjustments in financial plans and living arrangements.

Of course, anticipating problems and forestalling crises does not come easy to any system of collective endeavor. Foresight is a much needed, if poorly understood, political and managerial discipline that will be increasingly necessary if we are to stay ahead of burgeoning challenges. While the role of forward-looking and enlightened leaders cannot be underestimated, institutions and strategies can make a difference. Here are a few ways to get ahead of the curve:

o Governments and institutions must be positioned to provide credible information on the long-term outlook for important policy areas. The Kentucky Long Term Policy Research Center exemplifies this approach in state government, while institutions like the Government Accountability Office and the Congressional Budget Office serve as vital models by showing the long-term path of federal finances over the next 50 to 75 years. While leaders are aware of the near-term political risks of change, the risks of doing nothing can be made more compelling by providing analysis and education to both government leaders and the public.

o Slack resources should be set aside to deal with future events that are predictable and those that are not. States have succeeded in doing this by building up robust rainy-day funds during good years to help weather the bad, a practice that helped states deal with the drop in revenues from the recession in 2000. The federal government has no similar fiscal strategy, but imagine how much better off federal finances would be if we had retained at least some of the $5.6 trillion in budget surpluses that CBO projected in 2001 to deal with such shocks as September 11 and the current financial crisis.

o The decision-making process itself should be reformed to incentivize leaders to pay attention to the shadow of the future. For instance, state and local governments must disclose their long-term liabilities for pensions and other benefits for employees, which provides incentives to pre-fund these costs with today's resources rather than depend upon the uncertainty of tomorrow's fiscal realities. At the federal level, commissions can sometimes shield policymakers from blame when making hard choices to protect the future.

o Resilience should be an integral part of the system, so that leaders and followers can be more proactive in both heading off crises and in dealing with those that do occur. Strategic and tactical planning and training are critical, of course. But this approach also requires building a tradition of informed dialogue, reasonable debate and civility in discourse that promotes collaboration across parties and interest groups when the chips are down.

It is imperative, as we deal with the current economic crisis, that we take this opportunity to realize how important it is to face long-term challenges and to implement safeguards against future smoldering and sudden crises.

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