Saturday, August 6, 2011

Debt ceiling and deadlines

The debt ceiling saga of the last couple of months was a shame, but it produced some interesting discussions. First of all, my view is that the problem is mostly a problem of institutions. The debt ceiling is a rigid limit set up on borrowing for spending that has already been allowed. As a rigid limit, it is not robust to an unforeseen increase in borrowing, say because you are in a Great Recession. It is also not robust to a change in the Congressional norms: the increase in polarization has made the debt ceiling an hostage-taking situation, in the words of the Senate Minority leader himself(that is to say that comparing Republicans to hostage-taker is not as counterproductive, or stupid, as calling them terrorists)

In this sense, it is close to the filibuster rule, that allows 40 members of the US Senate to block a legislation or a nomination they disagree with. The filibuster somewhat worked(and that is still debatable) when Senators were nice to each other. Actually, the rule was made with the idea that senators were nice people in mind(see, for instance, Koger's great book) and that they wouldn't dare use the rule abusively.

Both rules have the problem of being extremely rigid. As Bruce Bartlett pointed out in the case of the debt ceiling:
It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional
And there's also a reason why the main option to get rid of the filibuster is called the "nuclear option".

One interesting thing to come out of the debt ceiling debate is the discussion about deadlines. Tim Geithner announced on May 3rd that the Treasury would hit the debt ceiling on August 2nd. There has been some debate along the way on whether this was a hard deadline, or whether the ceiling would have been hit a couple of days earlier or later, but basically, everybody considered August 2nd as the last day when Congress should come to an agreement.

Now, what happened with the debt ceiling was a pretty good illustration of why deadlines are sometimes bad. As Dan Carptenter wrote in the Washington Post, deadlines create various problems. I'll quote the article in length

Deadlines can’t make decisions for us
Delegating a decision to another group and giving it a deadline can also be a form of procrastination or avoidance. Many deadlines are simply not met. The European Union has for two decades tried to use deadlines to speed up the implementation of its directives, to little effect. From 1995 to 2002, almost 60 percent of the implementation decisions in the Netherlands, for instance, missed the E.U. deadlines.

Deadlines ratchet up stress, limit creativity and force mistakes.

“bad” stress can cause the human heart to respond inefficiently to pressure and can lead to avoidance of the task at hand. Another psychological study shows that as a deadline approaches, group participants disregard those who voice contrarian opinions.

Carpenter's research "found that medications approved right before these deadlines were considerably more likely to be pulled from the market or have significant warning labels attached later on."

Deadlines can slow things down.
Once a decision-maker misses a deadline — and many, many deadlines are not only missed, but are expected to be missed — there is usually much less incentive to continue speedy work.
Many deadlines are missed, leading to disenchantment and poor coordination.
 An externally imposed deadline interrupts a person’s or group’s independent work schedule.

You can find other interesting practical examples of those issues. In a recent article in Foreign Affairs, David Victor and Kassia Yanosek argue that  the imposition of deadlines created short-termism incentives for potential investors in alternative sources of energy.
 Every few years, key federal subsidies for most sources of clean energy expire. Investment freezes until, usually in the final hours of budget negotiations, Congress finds the money to renew the incentives -- and investors rush in again. As a result, most investors favor low-risk conventional clean-energy technologies that can be built quickly, before the next bust. 

Apparently, Carmen Reinhardt thinks that the problem that we saw with the debt ceiling deadline is international(yeah, not really convincing):

Ms. Reinhart said countries often did the greatest economic damage by agreeing on cuts at the 11th hour, in the desperate rush to complete a deal, without sufficient attention to the particulars.“That’s when politicians make the worst decisions often — they cut the things that would yield short-term revenues,” Ms. Reinhart said.

It's hard to say that deadlines are always bad, as any student would tell you. So when is a deadline desirable? I don't want to say something stupid(if I haven't done so already), and it's late so I'll think about it before blogging...

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