Too Big To Work

July 15, 2015
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Americans have a sour view of the federal government. Just one-third of people think Washington is competent. The public thinks half of taxes collected are wasted. More people say “government” is the nation’s most important problem than they say the economy, immigration, or terrorism.

And Americans are right. The federal government is wasteful and inept, which is a huge problem because it controls so many aspects of our lives. Federal spending consumes more than a fifth of the nation's income, and federal regulations infiltrate a multitude of state, local and private activities.

In recent years, big scandals have erupted at the Department of Veterans Affairs, Internal Revenue Service, Secret Service and other agencies. Federal auditors routinely uncover waste, fraud and abuse, and revelations about special-interest giveaways in Congress are commonplace.

But such problems are nothing new. In 1932, legal scholar James Beck explored wasteful federal spending in Our Wonderland of Bureaucracy,lambasting subsidies for shipping and sugar firms, and labeling farm subsidies a "stupendous failure" and "inexcusable legislative folly." Federal efforts to run businesses were "costly failures" of "extraordinary ineptitude." And regulations that were supposed to help rail customers instead increased costs. The problem with the government, Beck concluded, was that the "remedy may often be worse than the disease."

Failure has always plagued the federal government, and in recent years, that failure has multiplied as the government has grown too big to be adequately managed or overseen. While politicians usually blame federal bungling on the other party, the reality is that the only way to reduce endemic failure is to downsize the government.

Top-down planning

To understand the government, let's look first at markets. Their driving force is voluntary exchange. Buyers and sellers pursuing their own interests engage in billions of transactions, which are mutually beneficial and thus create value. Markets generate cooperation between disparate people, and they thrive on diversity.

Government does not work like that. Rather than voluntary exchange, it relies on top-down planning and coercion. As a result, it does not know whether its actions generate value. Because it imposes policies by decree, there is no sure way to know that they make sense.

The federal government imposes more than 3,000 new regulations each year, and spends trillions of dollars on more than 2,300 subsidy and benefit programs. These are funded by compulsory taxation, not customer revenue. Without voluntary agreement behind its actions, the government is flying blind on its decision-making, and so it makes a lot of mistakes.

It is true that in markets, businesses also make plenty of mistakes. But when they do, they are punished with financial losses and bankruptcy. A remarkable 10 percent of all American firms go out of business each year. So the market fixes its own mistakes, and it reallocates resources to better uses. By contrast, there is no built-in mechanism to prune waste in government, so the mistakes compound year after year and create rising economic damage.

Another failure created by the top-down nature of government is that its policies create winners and losers. For example, with the Affordable Care Act, consider that in markets, individuals choose their own levels of goods and service to consume. Markets cater to diversity. But government imposes one-size-fits-all schemes, which invariably make many people worse for wear. This suppression of individual choice in favor of top-down directives destroys value, and it is a key reason we should keep government limited.

People often assume that government has an advantage in tackling society's problems because it is a powerful institution that can use coercion. Actually, the fact that it can mandate actions and has a compulsory revenue stream is a huge weakness that leads it astray. Endemic government failure is baked into the cake because its misguided actions are not self-limiting the way that marketplace actions are.

Lack of knowledge

When the government subsidizes and regulates, it throws a wrench into market pricing, the key mechanism that makes economies work. Prices allow millions of individuals and businesses to coordinate their activities. They communicate data about changes in resources, tastes and technology, and they create incentives for people to produce and consume efficiently.

Whenever the government distorts prices, it can produce a range of unintended negative consequences. Minimum wage laws are intended to help workers, but they raise the cost of hiring low-skill workers, so businesses hire fewer of them. Farm price supports are intended to help farmers, but they prompt farmers to over-produce subsidized crops and under produce other, more valuable, crops.

Interventions create a range of side-effects. When farmers increase production of subsidized crops, they bid up land prices and bring less fertile lands into production. Those lands may require more intensive fertilizer and irrigation use, which can generate environmental problems. As land prices rise, it becomes harder for young farmers to break into the business.

Here are other examples of harmful side-effects caused by federal subsidies and regulations:

· Unemployment insurance induces more unemployment.

· Subsidized flood insurance induces people to live in riskier flood-prone areas.

· Irrigation subsidies cause over-consumption of water, which exacerbates droughts.

· Subsidized loans for housing and college induce people to borrow too much.

· Traditional welfare encourages people to work less.

· Ethanol subsidies reduce the cropland available for food and increase food prices.

· Trade restrictions designed to aid some industries harm others.

· Business subsidies undermine incentives for companies to innovate.

· Endangered species laws prompt landowners to rid their land of endangered species.

· Foreign aid empowers foreign dictators and stalls reforms.

· Disability benefits encourage people who could work to drop out of the labor force.

· Social Security and Medicare discourage saving for retirement.

· Health mandates raise insurance costs and induce firms to drop coverage.

· Drug prohibition spawns organized crime and violence.

· Fuel efficiency standards result in more people buying small cars and more road deaths.

Many policymakers mistakenly see the economy as a simple machine that can be easily manipulated. But they do not have enough knowledge to plan our complex economy successfully, and people are not as easily manipulated as the government thinks.

Economist Adam Smith famously observed: "The man of system … seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess board. He does not consider that the pieces upon the chess board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it."

More than two centuries after Smith, governments are still full of "men of system." They assume mistakenly that by regulating and subsidizing they can reorganize society to fit their vision. The result is failure after failure. One of actor Clint Eastwood's most famous lines is, "A man's got to know his limitations." The government should too.

Misaligned political incentives

In a romantic view of democracy, legislators always act with the interests of the public in mind. They grapple with policy issues, work toward a broad consensus and pass legislation that has strong support. They reevaluate existing programs and regulations, and prune the low-value and harmful ones.

Unfortunately, that is not how Washington works. Congress often enacts ill-conceived laws that do not have broad public support. Many programs perform poorly year after year, but receive growing budgets. Programs are almost never terminated because legislators will not admit that their favored programs do not work. Many failed programs are described at Cato's www.DownsizingGovernment.org.

The fundamental incentive steering political behavior is re-election. So members cater to voters in their districts, which is often a good thing. But it is also a source of policy failure because members focus on gaining benefits for their states at the expense of the nation. Many programs are enacted that have higher costs than benefits because minorities of members vigorously push them for parochial reasons.

Logrolling compounds the inefficiency. Lawmakers can bundle many low-value items — none of which has broad support — into an omnibus bill and gain enough votes to pass it. Logrolling has always been a key cause of wasteful spending. In 1836, for example, Virginia Rep. John Patton criticized a rivers and harbors bill as a "species of logrolling most disreputable and corrupting." That description matches the way the unpopular Affordable Care Act was rammed through Congress in 2010.

It is true that some legislators rise above parochial politics and pursue other goals. But those other goals often reflect personal beliefs that are untethered from reality. So the problem is that policymakers have no guide steering them toward making value-added decisions for the nation. Voters can help correct some of the worst abuses and mistakes. But most people are too busy with their lives to focus on the details of policy and the behind-the-scenes machinations on Capitol Hill.

Government failures are often caused by Congress intervening where it should not. The activist orientation of many members is reinforced by the environment in Washington. Special-interest groups dominate policy discussions. Most witnesses to congressional hearings favor the expansion of programs. Most visitors to member offices plead for special benefits. To lawmakers, the benefits of government action are often immediate and visible, while the costs are usually more distant and abstract.

Congress uses various techniques to hide the costs of programs. One technique is the use of borrowing, which makes a portion of spending seem "free" to taxpayers. Another technique is employer withholding of income and payroll taxes, which Congress mandates to reduce the psychic pain of paying taxes. With the use of these and other methods of hiding costs, lawmakers are emboldened to pursue additional low-value spending.

The amount of federal duplication and program overlap is remarkable. The government has 47 job training programs in nine different agencies. It has 15 programs for financial literacy. It has 15 agencies overseeing food safety, 20 programs for the homeless, 80 for economic development, 82 for teacher quality and 80 programs for helping poor people with transportation.

Legislators are entrepreneurs, and they gain prestige by creating new programs. They do not admit when their favored programs fail because their reputations and pride are on the line. Besides, trying to trim obsolete programs creates enemies, so few members focus on that. The consequence is that, over time, the government carries a growing burden of programs and regulations that weigh down the nation's productivity and reduce our freedom.

Misaligned bureaucratic incentives

Narratives about executive branch employees usually fall along two lines. They are either hard-working "public servants" who are skilled and politically neutral experts, or they are slothful and inept "bureaucrats" whose mismanagement is behind government failures. Which portrayal is more accurate?

Actually, the personal characteristics of federal employees is less important than the incentives they face. Federal employees face a range of incentives that generate failure:

· Absence of profits: Unlike businesses, federal agencies do not have the straightforward and powerful goal of earning profits. So agencies have little reason to restrain costs, improve the quality of their services, or increase their management effectiveness.

· Absence of losses: Unlike in the private sector, poorly-performing federal activities do not go bankrupt. There are no automatic correctives to programs that have rising costs and falling quality. In the private sector, businesses are forced by markets to abandon activities that no longer make sense.

· Output measurement and transparency: Business output can be measured by profits, revenue and other metrics. But government output is difficult to measure, and the missions of agencies are often vague and multifaceted. That makes it hard for Congress and the public to judge agency performance and hold officials accountable for results.

· Rigid compensation: Federal employee pay is based on standardized scales generally tied to longevity, not performance. The rigid pay structure makes it hard to encourage improved efforts or to reward outstanding achievements. The pay structure also reduces morale among the best workers because they see the poor workers being rewarded equally. Furthermore, the best workers have the most incentive to leave, while the poor workers will stay, decade after decade.

· Lack of firing: Disciplining federal workers is difficult because of strong civil service and union protections. Just 0.5 percent of federal civilian workers are fired each year, which is just one-sixth of the private-sector firing rate. The firing rate is just 0.1 percent in the federal senior executive service, which is just one-twentieth of the firing rate of corporate CEOs.

· Bureaucratic layering: American businesses have become leaner in recent decades, with flatter managements. By contrast, the number of layers of federal management has greatly increased. Paul Light of the Brookings Institution found that the number of layers in the typical agency has jumped from seven to 18 since the 1960s. He argues that today's "over-layered chain of command" in the government is a major cause of failure. Overlaying stifles information flow and makes it harder to hold people accountable.

· Political appointees: At the top of the executive branch is a layer of about 3,000 full-time political appointees. Administrations come into office eager to launch new initiatives, but they are less interested in managing what is already there. Political appointees may think that they know all the answers, so they repeat mistakes. The average tenure of federal political appointees is short — just two and half years — and so they shy away from tackling longer-term, structural reforms. Another problem, as we sadly witnessed during Hurricane Katrina, is that many appointees are political partisans who lack management or technical experience.

Can these problems be fixed? Many presidents have tried, beginning with Theodore Roosevelt and his Keep Commission of 1905. Roosevelt declared, "There is every reason why our executive government machinery should be at least as well-planned, economical and efficient as the best machinery of the great business organizations, which at present is not the case." Roosevelt was expressing Progressive-era optimism in government. But, as we now know, such optimism was misguided.

President William Howard Taft appointed a Committee on Economy and Efficiency in 1910. Then there was President Franklin Roosevelt's Brownlow Commission in the 1930s, President Harry Truman's and Dwight Eisenhower's Hoover Commissions in the 1940s and 1950s, President Ronald Reagan's Grace Commission in the 1980s and Vice President Al Gore's "reinventing government" project in the 1990s. Presidents George W. Bush and Barack Obama also took a crack at improving federal management.

But these efforts are just tinkering around the edges. Some indicators show that federal performance has gotten worse in recent years, not better. Management reforms cannot solve fundamental structural problems, such as the lack of incentives for cost control in government. The government will always fall far short of private markets in efficiency, value generation and innovation.

Huge size and scope 

Federal government has failed since the beginning. A federal effort to run Indian trading posts begun in the 1790s, for example, was beset with waste and inefficiency. Federal failure is a much worse problem today because the government has grown so much.

Its huge size is overwhelming the ability of lawmakers to allocate spending efficiently and to make needed reforms. Consider that the federal budget of about $4 trillion is 100 times larger than the average state government budget of about $40 billion. The federal government has many more employees, programs, contractors and subsidy recipients to keep track of than any state government. So even if federal legislators spent their time diligently scrutinizing programs, the job is simply too large for them to do effectively.

The federal government is not just large in size, it is sprawling in scope. In addition to handling core functions such as national defense, the government, as noted, runs more than 2,300 subsidy and benefit programs. It has spread its tentacles into many state, local and private activities, such as education, energy, welfare, housing and urban transit.

Congress has neither the time nor expertise to oversee all these activities efficiently. Members are spread too thin, which is evident from the fact that they routinely miss all or parts of congressional hearings. Congress grabs for itself vast powers over non-federal activities, but then members do not have the time properly to monitor how their interventions are working.

Numerous agency failures have erupted into major scandals recently, and each time the White House has claimed to have been unaware of the developing problem. It's lack of awareness is another failure. Numerous foreign policy developments have also caught the White House by surprise. The government is involved in so many activities that warnings about brewing failures are not percolating up to the president's desk until it is too late.

Meanwhile, members of Congress spend their time fundraising, securing benefits for their districts and giving speeches, but little time actually learning about policy. Members usually blame government failures on the executive branch, but they often fail in their own oversight roles. When the Secret Service and the VA scandals erupted in 2014, we found out that both of the problems had been developing for years, but went unaddressed by Congress and the executive branch.

The government is doing too much and doing little well. It is like a conglomerate corporation involved in so many activities that executives are distracted from their core business. Markets force bloated corporations to refocus and shed their low-value activities, but no mechanism forces the federal government to do so.

The more programs the government has, the more likely they will work at cross purposes. Some federal programs keep food prices high, while others subsidize food for people with low incomes. Some programs encourage people to live in risky flood areas, while others try to reduce flood risks. The government promotes breastfeeding, but it also subsidizes baby formula. Many programs subsidize healthcare and infrastructure, but regulations raise the costs of those activities.

Ironically, even as Congress has created programs to supposedly help the public, the public has not grown fonder of the government. Instead, people have become more alienated. Pew Research Center finds that the share of people who trust government plunged from more than 70 percent in the early 1960s to about 30 percent by 1980, even though that period was one of government expansion. Trust edged upward slightly during the 1980s and 1990s when domestic spending was being trimmed, but it has fallen since 2000 as the government has grown again.

As the government has grown larger, leaders have become overloaded. They do not have enough time to understand programs, to oversee them, or to fix them. The more programs there are, the harder it is to allocate resources efficiently, and the more likely it is that programs will work at cross purposes. Within departments, red tape has multiplied, information is getting bottled up under layers of management and decision-making is becoming more difficult because more people are involved. The government is failing more, and the public is getting more disgusted.

How to fix it

The federal government and the private sector both fail. The difference is that the government fails more and fixes less. But America desperately needs better governance to meet today's challenges in areas such as foreign policy, the global economy and our aging population.

The solution is to stop centralizing power in Washington, and to begin shifting activities back to the states. State and local governments suffer failures, but their failures are not thrust onto the whole nation. When policies fail in some states, other states can learn the lessons and pursue different strategies. States compete with each other for people and investment, which creates continuous pressure to reform.

Polls show that Americans support moving power out of Washington. Large majorities of people prefer state over federal control of education, housing, transportation, welfare, health insurance and other activities. People think that state and local governments provide more competent service than the federal government. And when asked which level of government gives them the best value for their taxes, two-thirds of people say state and local governments and just one-third say the federal government.

In sum, political and bureaucratic incentives and the huge size of the federal government cause endemic failure. The causes of failure are structural, and they will not be solved by appointing more competent officials or putting a different party in charge. Americans are deeply unhappy with the way that Washington works, and everyone agrees that we need better governance. The only way to achieve it is to greatly cut the federal government's size and scope.

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