2008 Northern Trust Forum
Crisis Management and Democracy in the Contemporary Era: Dilemmas and Strategies
The 2008 Northern Trust Forum was held November 13th and 14th, 2008. The Keynote Lecture, titled "Macroeconomic Disasters Since 1870", was delivered by Dr. Robert Barro in the new I-Hotel Chancellor Ballroom from 7:30-9:00PM November 13th. Dr. Barro also led a roundtable discussion and public forum earlier in the day from 3:00-4:30PM in the Illini Union Room 210 (General Lounge) titled "Crisis Management and Democracy in the Contemporary Era: Dilemmas and Strategies". All were welcome at these two public events.
Societies, like people, go through periods of crises. But it is hard to define what a crisis is without making reference to what it does. Generally speaking, a crisis is a traumatic or stressful change in life as we know it - as persons and as societies. Crises can be general, affecting virtually every aspect of life; or they may be partial, restricted to only one or a few dimensions of one's life. Crises are usually associated with disasters, catastrophes, suffering and misery. But they are also associated with innovation, development and progress. Finally, crises may be the result of the logical and natural development of life or it may be caused by unexpected, unanticipated events.
This year's Northern Trust Forum will focus on the myriad questions raised by the occurrence of crises at the societal level. How can we characterize a crisis? What do we mean when we say that we are living through a housing crisis in the United States? Or that the AIDS crisis is likely to affect many countries for generations to come? Or that the financial crises currently unfolding throughout the world will have lasting consequences? Or that party systems in industrialized democracies are in crisis?
To help us deal better with these questions the 2008 Northern Trust Forum will focus on the topic of "Crises, Disasters and Well-Being." This year's roundtable discussion is entitled "Crisis Management & Democracy in the Contemporary Era: Dilemmas and Strategies." Professor Robert Barro, a Harvard economist, will present the keynote address, "Macroeconomic Disasters Since 1870." Finally, small group discussions involving students and distinguished alumni and friends of the University of Illinois will focus on a set of crisis case studies that illustrate different issues and challenges that crises present. The case studies involve food, global warming, and the housing/financial crisis; they are outlined below. Participants in the small group discussions will be provided question sets and some background briefing materials to assist them.
The Food Crisis
In addition to the one billion people estimated to suffer from chronic hunger, two billion people are considered to be "food insecure." That is, they are malnourished and lack critical nutrients to perform the basic activities we call living. According to a 2007 estimate produced by the United Nations, approximately 18,000 children die everyday due to direct or indirect consequences of malnutrition. This situation started to get worse in the past couple of years and is likely to continue deteriorating if nothing is done. The high oil prices of the last few years, coupled with an increasing awareness among the public of the need to reduce consumption of fossil-fuels, led to an intense search for oil substitutes such as bio-fuels. This, in turn, led to an increased demand for crops that can be used in producing these fuels (e.g., corn to make ethanol, soybean and palm oil to make diesel fuel), thus triggering an intense competition between crop production for food and for bio-fuels. It is estimated, for example, that in 2007, over 20% of the United States corn crop was used to produce ethanol. Thus, we are now faced with higher food prices that make it even more difficult to feed the world's poor. The rolls of the malnourished and starving are bound to increase.
Most scientists today agree with the Intergovernmental Panel on Climate Changes conclusion (IPCC) that global warming is a reality: the average measured temperature on Earth has increased significantly in the past century. According to the IPCC, this temperature increased 0.74 ± 0.18 °C (1.33 ± 0.32 °F) during the 100 years ending in 2005. There is also a consensus that one of the major factors leading to climate change is the increase in man-made greenhouse gas concentrations in the Earth's surface. The consequences of a higher global temperature are dire: sea level rise, more extreme weather events, more and changed precipitation, expanding tropical areas, faster pace of desertification, changes in agricultural yields, glacier retreat, species extinctions and more and varied disease transmitters. Increased awareness of climate change has led to proposals (many) and actions (not so many) by governments, corporations, civil organizations and individuals aimed at curtailing or adjusting to global warming.
More and more individuals value energy-efficient goods and are willing to pay a premium for them. Environmental groups suggest the creation of quotas for fossil fuel production. Businesses invest not only in producing energy-efficient consumer goods but also in organizing production more efficiently, including the utilization of alternative fuels. Several mechanisms for emission trade are proposed or created, such as the European Union Emission and Trade Scheme. Internationally, governments come together in an attempt to limit the emission of greenhouse gases, such as through the Kyoto protocol, which amends the United Nations Framework Convention on Climate Change (UNFCCC) of 1992. Finally, other efforts have focused on deforestation, which has largely been ignored until recently.
The political problems involved in curbing climate change are enormous. They pit citizen against citizen, organized interest against organized interest, citizen against government, government against government, and generation against generation. Any action aimed at reducing climate change - from changing consumption patterns, to reducing greenhouse gas emissions, to stopping deforestation - imposes substantial short-term costs that will not generate benefits for many years. Moreover, any such action entails the possibility of "free-riding by individuals," groups and countries, which make it unlikely that effective policies will be adopted. How can these problems be tackled? Are we doomed to be politically paralyzed until we melt from the increased heat or drown from rising oceans?
The Housing and Financial Crisis
According to the Center for Responsible Lending, in 2007 more than 400,000 households lost their homes, compared to about 210,000 in 2006 - a 51% increase. At the same time, home prices dropped steeply - an average 12% during the 12 months beginning February 2007. This average figure masks the fact that the fall was considerably higher in many areas of the country. A Congressional committee projected a loss of $71 billion in housing wealth as a result of the decline in prices and the Conference of Mayors projected that 10 states alone would lose $6.6 billion in local tax revenue. Meanwhile, millions of people are losing their homes, the housing industry is shedding jobs, and the financial sector is facing it greatest crisis since the 1930's. Indeed, many respected economists and analysts see the country heading into dire economic straits and the federal government has proposed a rescue plan with a price tag in excess of $1 trillion dollars.
This situation stands in sharp contrast with what occurred just a few years ago. According to one estimate, the median price of a new single-family home increased from $215,075 to $254,423 between 2000 and 2006 - an increase of more than 18%. This suggested a problem of its own as incomes for workers and most families remained constant during the same period. Between 2000 and 2006, after-tax mortgage payments rose from 17.9% to 22.6% of income for homeowners, not including property taxes and utility costs. During the same period, the share of rent in tenants' income rose from 25.8 to 29%. As a consequence, by 2006, housing costs were higher than 30% of household income for one-third of all Americans. Which period can be characterized as a crisis? Can we say that society was experiencing a crisis when prices were increasing, or when they were declining? Or both?
These cases illustrate, albeit incompletely, the complexity of trying to think analytically about crises. They unfold in multiple ways; they have multiple causes and consequences; and they have a varied menu of viable responses. These challenges force individuals and societies into making trade-offs about values that may be equally worthy, thus compounding the construction of a unified framework for understanding crises. This notwithstanding, we believe that these case studies can help us outline the main dimensions of a crisis and think about how they can be addressed. In particular the case studies developed here introduce three key concepts that can be useful in understanding crises and the dilemmas they introduce. These concepts are unintended consequences, free-riding, and moral hazard. These concepts, which are of varying relevance in the three case studies, will be helpful in animating and structuring productive small group discussions during this year's Northern Trust Forum. Each concept is developed more fully in the various case materials.
Keynote Speaker: Prof. Robert J. Barro
Robert J. Barro is Paul M. Warburg Professor of Economics at Harvard University, a senior fellow of the Hoover Institution of Stanford University, and a research associate of the National Bureau of Economic Research. He has a Ph.D. in economics from Harvard University and a B.S. in physics from Caltech. Barro is co-editor of Harvard's Quarterly Journal of Economics and was recently President of the Western Economic Association and Vice President of the American Economic Association. He is honorary dean of the China Economics & Management Academy, Central University of Beijing. He was a viewpoint columnist for Business Week from 1998 to 2006 and a contributing editor of The Wall Street Journal from 1991 to 1998. He has written extensively on macroeconomics and economic growth. Noteworthy research includes empirical determinants of economic growth, economic effects of public debt and budget deficits, and the formation of monetary policy. Recent books include Macroeconomics: A Modern Approach from Thompson/Southwestern, Economic Growth (2nd edition, written with Xavier Sala-i-Martin), Nothing Is Sacred: Economic Ideas for the New Millennium, Determinants of Economic Growth, and Getting It Right: Markets and Choices in a Free Society, all from MIT Press. Current research focuses on two very different topics: the interplay between religion and political economy and the impact of rare disasters on asset markets.