Un-Stimulating Bureaucracy

September 21, 2010

An essay from economist Arnold Kling in the latest Cato Policy Report discusses what Kling calls the “knowledge-discrepancy problem.” This occurs when knowledge is dispersed but power is concentrated, and it is particularly acute in government.

In short, it’s impossible for government “experts” to aggregate the vast amount of knowledge that is dispersed throughout the economy in order to optimally direct economic activity. And as Kling notes, concentrating power over the economy in the hands of experts leads to ever more undesirable government interventions:

As we have seen, the expectations placed on government experts tend to be unrealistically high. This selects for experts with unusual hubris. The authority of the state gives government experts a dangerous level of power. And the absence of market discipline gives any errors that these experts make an opportunity to accumulate and compound almost without limit. In recent decades, this knowledge-power discrepancy has gotten worse. Knowledge has grown more dispersed, while government power has become more concentrated.
The failure of the administration’s stimulus plan illustrates the problem with empowering government experts to “fix” our incredibly diverse $14 trillion economy.
A Wall Street Journal article on the inability of government bureaucracies to utilize stimulus funds demonstrates the inherent inefficiency of government planning. For example, the stimulus provided $5 billion to the states for weatherization projects. But when a local official in Detroit began soliciting applications to weatherize houses, she ran into a buzz saw of federal and state red tape: 
But on the same day in March 2009 that Shenetta Coleman picked up applications from 46 companies, she received an email from the Michigan Department of Human Services telling her she couldn't award work to anyone. 
The problem: Ms. Coleman hadn't met requirements for her advertisement. Those included specifying the precise wages that contractors would have to pay, and posting the advertisement on a specific website. There were other rules—federal, state and local—for grant and contract-award processes, historic preservation and labor standards.
The bureaucratic obstacles Ms. Coleman hit took more than a year to clear. Some were mandated by the stimulus bill, the same legislation that was supposed to rapidly create jobs. For example, there is a union-backed provision that requires that weatherization workers receive the prevailing wages in the area.
The stimulus is also distorting employment by incentivizing workers to obtain job-skills on the basis of government planning. The WSJ article cites the example of an unemployed worker who enrolled in a weatherization training class when she learned that Detroit would be receiving $30 million in weatherization funds:
She studied energy-saving principles, practiced drilling holes into walls and blowing in insulation, and learned how to install windows. She graduated in March, at the top of her class. For the next four months, she couldn't find work. “I was hanging on by a thread,” said Ms. Wallisch. In July, she was hired for energy-conservation work funded not by the stimulus plan, but by Michigan's utility companies.
The recession, and consequent rise in unemployment, led to demands for the government to “create jobs.” However, merely throwing taxpayer money at government job-creating schemes, which was the solution the government’s “experts” came up with, was never a viable solution. The experts simply do not have the requisite knowledge to match millions of workers possessing diverse job-skills with the diverse needs of millions of employers.
From Kling:
What the issue of job creation illustrates is the problem of treating government experts as responsible for a problem that cannot be solved by a single person or a single organization.
Economic activity consists of patterns of trade and specialization. The creation of these patterns is a process too complex and subtle for government experts to be able to manage.
The issue also illustrates the way hubris drives out true expertise. The vast majority of economists would say that we have very little idea how much employment is created by additional government spending. However, the economists who receive the most media attention and who obtain the most powerful positions in Washington are those who claim to have the most precise knowledge of “multipliers.”
As I have previously discussed, the average citizen has become conditioned to reflexively turn to the government to in times of crisis. Government officials are only too happy to oblige as they are naturally inclined to operate on a short-term horizon (i.e., the next election). Fortunately, more and more Americans appear to be realizing that the government and its experts are the problem rather than the solution. 



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