It is hard to know what to do when short-run solutions to problems lead to more severe difficulties.
When such longer-run complications materialize, Monday-morning quarterbacks often take cheap shots at short-sighted decisions. But at the time, such decisions often enjoy broad political support and reflect the economic realities of the day. Three things going on right now illustrate the phenomenon.
In geological time, there is little question that the Atchafalaya River will capture the Mississippi River, turning the last 300 miles of the latter, including stretches through New Orleans and Baton Rouge, into a tidal bayou. This would have devastating economic effects on these two cities and on the “American Ruhr” complex of refineries and chemical plants along the river. Instead, the water that now rolls through New Orleans will enter the Gulf of Mexico below Morgan City.
Such shifts of outlets are common. In 1852, the mouth of China’s Yellow River moved some 400 miles. The mouth of the Mississippi has shifted about every thousand years, from near the Texas state line to well east of its current location. The most recent shift started in the 1500s when an oxbow of the Mississippi intersected the Red River and created the Atchafalaya. It became acute after high-water flows from the Mississippi to the Atchafalaya increased after 1840.
If nothing had been done, the Atchafalaya would have become the main outlet some time in the 1970s. Congress feared economic disaster and charged the Corps of Engineers with stopping this natural process. The Corps built the Old River Control Structure complex near Torras, La., to direct 30 percent of the Mississippi’s flow into the Atchafalaya, but prevent any further shift of channels.
That structure has been successful so far, although it nearly washed out in 1973, nine years after completion. It may be successful for another 50, 100 or even 500 years. But geologists and engineers agree: time is on Mother Nature’s side.
FOREIGN REGIMES, SHORT-TERM DECISIONS
The second example is U.S. support for authoritarian regimes in Egypt, Tunisia, Yemen and elsewhere. History tells us that regimes like those of Hosni Mubarak and Ali Saleh in Yemen eventually fall. So will the Saudi regime. It also teaches us that the longer they are able to stave off change, the more drastic any eventual adjustment must be.
Our country historically supported such regimes for political reasons: to keep out the Soviets, to support Israel, to maintain “regional stability” or for economic ones such as access to Persian Gulf oil exports. In many cases, the political and economic objectives are intertwined.
We know autocratic regimes eventually fall and that when they do, having been their supporter becomes a liability. But short-run political and economic pressures make it difficult to sacrifice ongoing benefits for a more advantageous position down the road. Jimmy Carter dabbled at this in his human-rights stands and in extricating the United States from the Panama Canal Zone and was excoriated for his weakness in foreign policy.
In economic policy, long historical experience teaches that letting large financial institutions fail can, from time to time, topple a series of dominoes and throw a country into a depression. But if you implement a policy of intervention to keep all large banks and funds afloat, you create perverse incentives for large institutions to take on greater and greater risk.
There is a direct line from Continental Illinois in 1984 through Long-Term Capital Management in 1998 to Bear Sterns and AIG in 2008. Treasury Secretary Paulson and Fed Chair Ben Bernanke may have pulled the economy back from an abyss in 2008, but they may also have sown the seeds of an even greater collapse at some point in the future. In effect, we doubled down. The U.S. financial sector is even more concentrated and dependent on the stability of a handful of very large firms than it was five years ago.
PATH DEPENDENCIES ARE EVERYWHERE
Whether it was French planters building levees two feet high around their houses in the early 1700s, the Eisenhower administration seeking reliable anti-communist allies in the Mideast in the 1950s or the Reagan, Clinton and Bush administrations seeking to avoid financial market crises on their watches in the past 30 years, no one had a grand long-term plan in mind. Each did what seemed economically and politically best in the moment.
However, in a policy variation of the “path dependency” that gave us the QWERTY keyboard or railroad rails 56-1/2 inches apart, once we started to build levees, support friendly Arab regimes and keep big banks from failing, it became progressively more difficult for later decision makers to take different courses. Moreover, under the perceived protection of such policies, greater and greater interests, political and economic, became at stake.
No one knows when Saleh will step down in Yemen or has any idea when the Saudi regime will give way to something else. No one knows when or exactly where the Mississippi will break through its west bank into a much shorter, steeper path to the Gulf. And no one knows when the next financial crisis will flare.
But with 2,080,000 cubic feet of water rolling past Vicksburg every second as I write this, just 130 miles above Old River Control, with interest rates on Greek government bonds above 16 percent while public employees demonstrate in the streets of Athens and while Syrian tanks shoot up Syrian cities, 2011 looks to be an interesting year.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.