Occupy Wall Street…Next Stop, Athens?

It would be better to reform our system radically and restore fiscal responsibility in a single dramatic turn.

In the past few weeks Americans have watched with interest, bemusement and anger as protests and sit-ins on Wall Street have sparked similar demonstrations around the country. With vague goals of combating corporate greed and calls to rectify all manner of social and economic inequality, this movement seems, to the press at least, to capture a mood of deep discontent among the American people.

But if you think a thousand protesters on Wall Street is a trouble sign for our nation, wait until you see the civil unrest that follows the reforms and cuts to government programs needed to bring our national debt under control. Just look at Greece, where government is being reformed, drastic cuts are being made–and the society is unraveling. In Greece a series of severe austerity measures has been imposed as conditions for recent bailouts by the International Monetary Fund and the other members of the single European currency, the euro. Yet the economy continues to spiral downward.

And with each new round of reforms in Greece, misery and unrest are on the rise. Strikes and angry street protests are a daily occurrence, as unions fight decreases in pay and benefits for their workers, students protest the lack of opportunity and ordinary citizens resist reforms and tax increases. The confrontation with authorities is impeding business and destroying tourism, deepening the crisis further.

Some of that struggle is for naught. The Greek government couldn’t reduce austerity measures if it wanted to. Fiscal policy is now out of its hands and likely to remain so for decades, perhaps generations.

And while most Greeks agree the bloated state must be streamlined, they’re stiffening their resistance to reform. That’s why many in the euro zone believe Greece must default in order to rebuild a more efficient government.

America isn’t in that predicament– yet. But there are cautionary lessons to be lifted from the outraged streets of Athens. As the Greek example shows, government largesse is easy to expand but difficult to cut back without inflaming people.

For years our politicians have framed increases to government benefits as compassionate and obligatory. Now all that overspending must be pared back and government programs reformed to curb the federal deficit. But each round of needed cuts and reforms will likely cause misery–in an amount substantially greater than the happiness generated by spending increases.

Behavioral economics, which uses social and psychological factors to predict a population’s decision-making behavior, captures this paradox in two fundamental principles.

First, the principle of “loss aversion” explains that people hate to lose something more than they value receiving something. So, even if many Americans don’t value existing government programs and spending very highly, they will likely be very unhappy about the loss of those same goods and services.

Second, even if you streamline our government and make programs more efficient, the “endowment effect” predicts that people will still oppose changes to the benefits they receive. This is because people tend to value the goods and services they have more than they do equivalent replacement goods and services. The endowment effect makes it very difficult to exchange existing benefits for new ones and thus to “reform” government programs.

Whether we cut spending and make reforms now or later, course correction will be difficult and even potentially dangerous to our nation’s stability. Just look at the resistance of public employees in Wisconsin, Indiana and elsewhere to relatively minor cuts to see how people will contest vigorously any decreases to their benefits and programs.

Behavioral economics teaches us that any time we make changes and reduce government benefits and programs, we can expect people to be very upset about those decisions–and likely resist them. Still, we need significant reforms and deep cuts to put the U.S. on track toward a balanced budget.

Paring back government will undoubtedly cause misery and social dislocation. However, “death” by a thousand small cuts will intensify civil unrest and may produce revolutionary fervor unlike anything we’ve seen in America in our lifetime. Our nation will be better off by reforming our system radically, in a single dramatic turn, rather than piecemeal–or face something very like the furious streets of Athens.

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