Saturday, August 13, 2011

A theory of government part 2


It would be one thing if, after arriving in Washington, politicians merely contented themselves with fundraising dinners and speeches, but unfortunately many of them insist on engaging in actual legislating.

Otto von Bismarck probably put it best with his famous quip that "laws are like sausages, it is better not to see them being made." Virtually all legislation is flawed, even in the eyes of its supporters. Take Obamacare for example. This legislation passed without attracting a single Republican vote. No compromises had to be made with the GOP, only among Democrats. And yet what emerged was a 2,000+ page monstrosity beset with various glitches that have subsequently been discovered. While it's not difficult to find people who believe the legislation is a net positive that will improve health care in the country, it's pretty difficult to find anyone who believes it represents some kind of ideal.

And this is symptomatic of all legislation. Familiar with the expression that too many cooks spoil the broth? Well guess what happens when there are 535 senators and representatives in the kitchen along with their lobbyist assistants? Legislation is not crafted through strenuous analysis and debate, with the best ideas rising to the top, but through time honored traditions such as logrolling, horse-trading and other forms of legislative bribery (note Rep. Nick Smith's claims during the vote on the Medicare prescription drug act) or threats of retribution for those who fail to fall in line (e.g. denial of prestigious committee assignments).

This is the process that gives us ridiculous outcomes such as special privileges for the sugar industry, the Cuba travel ban, restrictions on wine selling, empty flights to rural airports, the Jones Act and the Wright Amendment -- all of which represent the triumph of special interests over the general welfare of the US citizenry.

Compare this to the approach taken in the private sector. Does anyone think that Steve Jobs, when pursuing a new product, just tries to get buy-in from all the various departments at Apple by offering various pay-offs or threats and then calls it a day? Does the iPhone strike anyone as the result of an unholy compromise between the engineers, designers and marketing department? Of course not -- Jobs doesn't rest until he believes he has a product that represents excellence and will succeed in the marketplace. But then again he can do that since he's boss and has the ultimate say -- not so in the legislative world.

After legislation is passed, it then has to be implemented, which brings us to the bureaucracy.


The term bureaucracy connotes sloth, inflexibility, stupidity and red tape. These are no accidental byproducts of the system, they are how it's designed. Let's take a closer look at some of the inherent flaws involved:

Inflexibility: Bureaucracies do lots of things that would appear to run counter to common sense. They shut down lemonade stands, fine people for helping injured woodpeckers and declare chain link fences to be historic. While this upsets plenty of people, I actually have considerably sympathy for the bureaucrats. After all, they are simply implementing the law. In fact, if they were to be arbitrary in the law's enforcement ("Hey, it's just a kid's lemonade stand, leave them alone") then we no longer have rule of law, but the rule of men (This is also why bureaucracy involves a myriad of forms and paperwork, and why firing everyone from teachers to federal workers is a near Herculean task, with everything documented ad nauseam to prevent abuse and arbitrary exercises of power).

Don't be angry at the bureaucrats, they are simply doing their jobs. Instead direct your wrath at the legislators that cooked up these absurd laws and empowered the bureaucracies to dream up various regulations. Anger at the bureaucrats is simply shooting the messenger.

Poor incentives: Let's consider the incentive structure faced by the head of the Food and Drug Administration. If a new drug is swiftly approved and saves thousands of lives, how much does the FDA chief benefit? Probably not at all. But let's say that a flawed drug is swiftly approved and costs thousands of lives? That no doubt means an unwanted trip to 1600 Pennsylvania Ave followed by swift dismissal and a permanent black stain on the record. So which is more likely: the FDA will try to achieve a balance between safety and getting products to market, or it will be far more biased in favor of additional testing and scrutiny even if it means added suffering and possible death in the interim for those the drugs are meant to help?

It isn't only the FDA -- the same can be applied to plenty of other agencies. Is it in the interest of the head of the EPA to seek the cleanest air possible or to carefully balance the marginal benefits of new regulations against its economic impact? Does the TSA seek a balance between security and liberty/hassle or is it far more biased for the former? 

Empire building: Like most organizations, bureaucracies are self-aggrandizing entities forever seeking additional power and resources. How many head bureaucrats lobby for their organization to have fewer powers, less staff or a reduced budget? Everyone thinks their organization is crucial and essential. No one volunteers themselves as superfluous.

Knowledge problem: Quite simply, bureaucrats don't know that much, at least relative to markets. Imagine that the political left got its dream and the government took over the health care sector entirely. How would bureaucrats know where to build a hospital, or how many beds should be in it? With markets this is easy -- just look at prices. The more prices go up, the greater the need there is for health care resources in a certain location. Bureaucrats lack such knowledge.

Spending other people's money: Self-explanatory. Not much of a mystery why government is synonymous with cost overruns.

To summarize, government is a system in which rationally ignorant (and possibly irrational) voters elect self-serving politicians to craft imperfect legislation that is then carried out by inflexible, self-aggrandizing bureaucracies that suffer from a lack of knowledge and face a poor incentive structure while spending other people's money.

Compare all of this to the private sector. While it may suffer from many of the same flaws, private corporations which fail to generate value or use resources effectively are ended -- killed off by the market. Government, in contrast, will invariably insist that it can succeed if only given more money, and failure is likely to be rewarded with the allocation of additional funds. When is the last time, if ever, a bureaucracy insisted "We gave this a shot, are not very good at it, and probably don't deserve to exist any longer"?

Which system is preferable? Which do we want more of our lives impacted by? That the private sector regularly outperforms government is no accident, it is simply a logical outcome given the structures and incentives faced by each. While some government is necessary to carry out those functions the private sector cannot -- national defense and environmental regulation readily come to mind -- it should be kept as small as possible and limited to the provision of true public goods. Anything else is simply illogical, and properly viewed as placing government as an end rather than a means.

Update: Mark Perry notes a stunning contrast between government and the private sector.

No comments: