Introduction
Among liberal democracies, Americans are by far the most patriotic people and America has the most robust and creative civil society. There is a growing antipathy to the Federal government in American society.
A policy is a statement of goals. A program is an instrument for implementing a policy, though the terms can be used interchangeably.
A majority now believes that big government is the biggest future threat to the country. In the 1950’s, the vast majority of Americans trusted the federal government to do the right thing in most instances, today only a tiny minority do. Today the public views the federal government as a chronically clumsy, ineffectual and bloated giant that can’t be counted on to the do the right thing much less do it well. Schuck gives 5 reasons as follows.
- The federal government performs poorly in a vast range of domestic programs.
- Our legislative process is highly dysfunctional
- Americans see a huge gap between the performance of the federal government and that of local institutions.
- Americans have the self-justifying view that they are not responsible for the policies and programs that are the result of their failure to vote more intelligently.
- Our founders placed their faith not in individual virtue, but in institutional arrangements.
It is much harder to assess government failure than market failure and to conclude that public programs do or do not work.
Interest groups are the lifeblood of a vibrant democracy and political polarization does not explain policy failure. There has been remarkable and accelerating growth in the federal government’s programmatic ambitions. The ratio of new federal agency rules to laws passed by Congress has exceeded 200 to 1 in the last decade. The expansionary dynamic is apparently irreversible because the realm of policy knows no conceptual bounds. A larger share of Americans receives entitlements than ever before. Regulatory agency growth is out of control. Policies that don’t work waste resources, reduce economic growth, and threaten the government’s legitimacy. It seems that public demands for more government intervention rise in tandem with the public’s dissatisfaction with government.
Reforming the pathologies imbedded in the weak family structures of our underclass, our fiscally unsustainable entitlement programs, and our persistently mediocre elementary and secondary education requires big changes many of which the federal government cannot effectively address, but we should require government policies that address them to at least be cost effective. The biggest threat to our national security is probably the unsustainable increase in our national debt driven by misguided and irresponsible entitlement and social welfare policies.
It’s estimated that regulatory costs annually are in access of $10,000 per American employee and these costs are eroding one of our most important competitive strengths.
Political polarization is a consequence of a fundamental disagreement among Americans about what kind of country they want.
Americans have far less confidence and trust in the federal government than formally. Federal policy intervention has increased as public mistrust of government has risen. This correlation is so consistent that it seems clear that public disaffection has risen because government intervention has become so pervasive.
Under the old system, when it was proposed to add a new issue to the public agenda, there was a usually a debate about whether it was legitimate for the federal government to get involved, so most ill-advised proposals for new, large scale government programs were strangled in the cradle. However, it was easier for the federal government to expand its reach into a new area of government policy during a crisis. The trend is for each succeeding crisis to leave the government bureaucracy larger, but under the old system when the crisis ended the extraordinary power ended.
Under the new system there is a much larger policy agenda, less debate about the legitimacy of government action, decentralization of power in Congress, and multiplication of interest groups. Under the old system the checks and balances made it difficult for the government to start a new program but under the new system these checks and balances make it hard to change what the government is already doing. These institutional and attitudinal changes place far greater demands today on a government already prone to policy failure. Understanding the deep systemic causes of programmatic failure reveals the folly in claims that more authority and resources would enhance governmental performance.
The decline in public confidence has paralleled a large growth in the share of federal expenditure devoted to safety-net programs. The correlation is consistent.
State and local governments constitute about half of the nation’s public sector and have expanded their work forces far more than the federal government.
This book mainly deals with what kinds of programmatic tasks the government pursues, how well it performs them, and why it fails so often. The book focuses on structural endemic forces that shape government performance.
The effectiveness of the bureaucracy is given no serious attention. Only a tiny fraction of 1% of government’s expenditures are devoted to assessment of its programs’ effectiveness.
The Congressional Budget Office (CBO) conducts only prospective, predictive assessment of proposed policies, so its reports do not assess program effectiveness. (Studies of program effectiveness by OMB, BOOKINGS, AEI, CATO, HERITAGE and others have all found that very few federal programs produce a measurably positive result.)
Policymakers vastly underestimate the barriers to more effective government.
Both government and markets can fail, but failed products quickly exit the market: failed government programs, like diamonds, are forever. There are mountains of empirical evidence on the ineffectiveness of most government programs. It is easier to start new programs than to end old ones. There are deep recurrent reasons for widespread government failure and most of them are endemic to our system. Policymakers have a severely limited understanding of the complex social world they seek to change and of the tools needed to change it. But improvements are possible if the public is better informed about how human nature operates in the political arena, about how government works and doesn’t work, and about what it can and cannot realistically deliver.
Markets, protected by property rights and the rule of law, advance many precious human values; liberty, decentralization of power, competition, individual choice, productive incentives, prosperity, a robust civil society; and crucial information about costs, benefits, and desires that can’t be obtained as well in any other way. And they have improved the standard of living of billions spectacularly in the past few decades, and they strengthen many of the civil society institutions on which the quality of community life depends.
Much policy making seeks to address market failures, but it’s hard to know whether a particular failure warrants government policy change and whether government interventions can improve matters.
The pro-market default, which the new system has weakened, reflects three sturdy national values and a common misperception. The values are: a capitalism friendly ideology, materialistic consumerism, and mistrust of centralized government power. The misconception is that our political economy is divided into two separate spheres – government and civil society (which includes markets) – whereas in reality they are hybrid, highly interactive forms shaped by each other. Markets’ complex relationship to public policy plays an important role in every area. Schuck seeks to show that the root causes of endemic policy failure are structural and largely inescapable under present policy making conditions, and that government failures do not merely reflect poor implementation and unsound policies, but are built into the system.
Chapter 3 provides background on how public policy making works divided into five parts. 1. The different functions government performs. 2. The process of policy formulation. 3. The missions the agencies are assigned to perform. 4. The diverse instruments used to perform them. 5. The most important institutions and practices that constrain government performance.
Chapter 4 analyzes the political/cultural environment in which our policy making operates, focusing on 10 elements of this culture: 1) constitutionalism; 2) decentralization; 3) protection of individual rights; 4) interest group pluralism; 5) tolerance for inequality; 6) religion and political moralism; 7) social diversity; 8) populism; 9) public opinion; and 10) civil society, all of which influence and affect policy makers.
Chapter 5 explores the incentives of policy makers and of private actors whom policies affect (including policy-induced moral hazard)
Chapter 6 focuses on: information inadequacies, the inflexibility of the policy system, the credibility problem, and mismanagement
Chapter 7 focuses on how markets affect policy performance including 9 reasons why markets tend to confound the effectiveness of policies that seek to perfect them: (1) speed;(2) diversity; (3) information demands; (4) price and substitution effects;(5) trans-jurisdictional rule effects; (6) political influence;(7) obstacles to policy enforcement;(8) informal markets; and (9) lack of good substitutes for market based ordering. Some of the reasons for policy failures are a flawed social or casual theory, faulty program design, ignorance about the force of the relevant market and/or political-bureaucratic impediments, and many other unforeseen developments.
Schuck examined 6 broad categories of policy goals directed at markets: 1) perfecting them; 2) eliminating them; 3) redirecting them; 4) midwifing them; and 5) mobilizing them for regulatory purposes.
Chapter 10 discusses the growing pathologies of the civil service bureaucracy.
Cautious, carefully tested reforms produce better outcomes than more radical ones would because of our cognitive limitations, our complex social systems, and our diverse views on what constitutes good policy. Comprehensive reforms often come a cropper.
Chapter 2
Bad policy categories include a mix of design and performance failures including; those that are so poorly enforced they don’t work, those that entrench an undesirable status quo and retard innovation, those that the private sector can do better at lower cost, those that reduce or bar competition from the private sector, those that create uncertainties that discourage beneficial investments, those that give officials too much or too little discretion, those that threaten Constitutional values, those that increase moral hazard for either private or government actors, or both, those that encourage self-destructive behavior among those targeted for help, those that are costly relative to the benefit, those that invite fraud, etc.
Policy assessment requires systematic goal clarification, fact gathering, and analysis. Shuck thinks every policy’s assessment criteria should be designed to determine its effectiveness defined by its efficiency, equity, and manageability.
Guidelines for incorporating cost benefit analysis (CBA) into policy decisions.
Policy makers should only intervene to correct market failures when: 1) an actual market failure exists; 2) the market failure is large enough to justify an intervention; 3) substantial public values are threatened by the anticipated length of time required for the market to self-correct; and 4) the intervention is likely to succeed.
Many public policies, especially those designed to correct market failures, do not satisfy these tests. Cost benefit assessments should always focus on the fact that the cost benefit ratio always worsens as the policy benefit level increases, becoming prohibitive as it approaches 100% achievement, as in clean air policies. The highest levels of benefit are always much more costly per unit than at lower levels of benefit. For example, 90% of benefit may be cost effective and 95% prohibitive.
Resource scarcity makes target efficiency a compelling policy criterion. (There is an important footnote on the bottom of pg. 54). Ideally, policy makers would look across the government as a whole and asses where taxpayer dollars would do the most good, but instead, congressional appropriations committees’ members are most influenced by narrow constituency interests. The OMB’s sectorial program officers divide up the budget by program and function, and the executive branch’s departments and agencies do the same, so the whole process is narrowly focused on discreet programs and policy areas. No one actually takes responsibility for target efficiency in the government as a whole.
The Environmental Protection Agency’s regulatory regime is misguided and far more costly than policies based on market incentives, so fails the cost effectiveness test.
CBA should be used to retrospectively analyze the effectiveness of existing policies – not just proposed ones. Such systematic retrospective reviews are indispensable. The predictions of programs’ sponsors are singularly unreliable guides to policy assessment. Politicians, interest groups, and bureaucrats always have a powerful incentive to predict minimized costs and maximized benefits. Minimizing policy makers incentives to underestimate costs and exaggerate benefits is one of our most challenging and urgent tasks.
Evidence is conclusive that experts are worse at prediction than non-experts of similar intelligence. Experts are specialists in the areas of prediction and their reasoning style traps them. The tentative, balanced mode of thinking predicts better than the confident, decisive mode. When attempting prediction, experts are slower to change their minds because of belief system defenses. They tend to close-mindedness – dismissing dissonant possibilities too quickly. They are over-confident in their predictions and prone to systematic underestimation of uncertainty. Experts are notoriously susceptible to confirmation bias.
Success of federal programs depends on accurately predicting the interactions of autonomous individual actors and voters, bureaucracies, markets, other levels of government and other factors. So it’s obviously very difficult to accurately predict the significant effects of major government programs. One of the most favorable policy successes is ending a failed government program.
Successful policy making requires accurate organizational analysis. How the organizations evolve will affect how they carry out their specific tasks and interact with each other.
The randomized controlled experiment is the gold standard for assessment of policy effectiveness but is rarely used by government.
Well-established criteria, certified in analytical methodology, are available for determining the effectiveness of government policy. The assessments of government policy done so far have been consistently negative. In nearly all areas of government policy the applicable legislation has unrealistic objectives, clumsy implementing procedures, and poor targeting of funds. The cost, in terms of waste, frustrated expectations and harmful side effects is enormous.
Chapter 3 – Policy-Making Functions, Processes, Missions, Instruments, and Institutions
Schuck says the federal government has three basic functions: production, regulation, and redistribution. Production involves national security, infrastructure, research, etc. Regulation and redistribution are self-explanatory.
Erosion of social capital is both the cause and an effect of improper government functioning.
The legislative agenda is formed through a chaotic, adventitious, opportunistic process that is the very opposite of rational prioritization and problem solving.
Federal agency bureaucratization tends to produce tunnel vision, middling competence, limited imagination, fear of controversy, and obsession with process.
The appropriate allocation of policy discretion between Congress and the agencies is tremendously important and receives inadequate focus and attention. The Supreme Court’s non-delegation doctrine held that Congress possesses the exclusive power and responsibility for legislative powers and may not delegate to the agencies the power to make fundamental value and policy decisions, but the courts have been lax in enforcing this.
MISSIONS
Traditionally, legislation defined an administrative agency’s mission, but since the 1960’s Congress has enacted five kinds of statutes that, instead of a single mission focus, affect all agencies’ missions across the board and enormously complicate their tasks. These type statutes multiply the number and variety of missions and constraints and often conflict. Congress sometimes assigns similar missions to multiple agencies, leading to interagency conflict, policy incoherence, and multiplication of difficult policy trade-offs.
INSTRUMENTS
There has been a revolutionary and massive proliferation in the means and instruments used to address public problems. Some of these tools are (1) direct bureaucratic administration; (2) government corporations and government-sponsored enterprises; (3) economic regulation; (4) social regulation; (5) government insurance; (6) public information and program advocacy by government; (7) corrective taxes, charges, and tradable permits to create incentives or disincentives; (8) contracting; (9) grants; (10) loans and loan guarantees; (11) tax expenditures; and (12) vouchers;
INSTITUTIONS
Our two major political parties were, until the last 50 years, less ideological and more heterogeneous demographically. The coalitions backing the Democratic and Republican Parties are not structured alike. Democrats are mainly a mosaic of interests making claims on government. Republicans are bound together more by ideological agreement. The relationship between parties and policies is heavily influenced by our plurality (winner take all) elections, and the Electoral College for the presidency affects politics, parties and policy making. Both fortify the system of having two broadly based parties.
Plurality based, two party systems are less likely than proportional representation systems to elect leftist governments that will aggressively re-distribute wealth. The plurality system helps maintain a stable two-party system and promotes political moderation. It is more likely to avoid extreme public policies.
Chapter 4 – The Political Culture of Policy Making
Schuck focuses on 10 elements of American culture: (1) constitutionalism, (2) decentralization, (3) protection of individual rights, (4) interest group pluralism, (5) acceptance of social and economic inequality, (6) religion and political moralism, (7) social diversity, (8) populist suspicion of technical expertise and official discretion, (9) public opinion, and (10) civil society. Democracy and patriotism are highly relevant to policy making.
CONSTITUTIONALISM
The Constitution is our civic religion, our ultimate authority and source of fundamental principles.
Our Congress is the most powerful legislature in the world.
The constitutional authority of the federal courts to constrain the actions of both agencies and legislatures makes our policy making system remarkably accessible to the people. The Constitution, especially The Bill of Rights and The Fourteenth Amendment, orient judicial power to the protection of individual rights at the expense of government claims.
Our constitutionally constrained system of administrative law delegates enormous power and discretion to federal agencies, but under political conditions that make it difficult for them to exercise these powers to the extent of their European counterparts. Our constitutional system leaves many of the most important political functions; education, land use, criminal justice, tort law, etc. to state and local government.
DECENTRALIZATION
Our hostility to centralized power is institutionalized in the distribution of government authority with both horizontal (separation of powers) and vertical (federalism) elements. Americans are more anxious than Europeans to minimize the harm that government can do.
LOCALISM is the principle that if government power is exercised it should be exercised at the lowest level of government that can appropriately do it.
Very few federal domestic programs are administered exclusively from Washington other than Social Security. Medicare does not involve the states, but is administered through intermediaries. Nearly all other federal programs delegate federal funds and substantial policy making to the states.
Schuck labels privatism the uniquely American belief in individual liberty, authority, and responsibility – the American belief that individual families, firms, and other civil society groups should exercise the dominant power over important decisions that in most modern democracies are made primarily by government. In most of these areas, the Constitution keeps government at bay. The moral quality of life is degraded if government intervenes excessively in these areas. Individuals are the best judge of their interests and when government makes choices for them they are often the wrong ones. When citizens are deprived of autonomous choice by government their capacity for reasoned deliberation and initiative atrophies.
In America many functions that are governmental in other advanced societies are performed by private industry which can perform them more cheaply and better due to competition induced efficiencies.
PROTECTION
Americans uniquely cherish negative liberty, i.e. freedom from government restraint. Americans preference for individual rights and negative liberty make them suspicious of group rights. The ethos of individualism invades almost all of our institutions and public policies, of which religious liberty is probably the most important.
The commitment to individual rights is most evident in the extraordinary power of American courts. The link between individual rights and the extent of judicial authority is stronger and deeper in the U.S. than any other constitutional democracy. Other countries give more power and discretion to administrative agencies and make it harder to challenge them in court. The open-ended nature of most legal texts, particularly The Bill of Rights and the Due Process and Equal Protection clauses invite judicial interpretation, which often amounts to judicial law making.
James Madison in, Federalist No. 10, described how self-interested activities could, in a large republic, advance rather than paralyze democratic government because many diverse interests would conflict with each other and prevent any from gaining excessive political power. Interest groups affect every stage of policy making: agenda formation and prioritization, public mobilization, the legislative and regulatory process, budgeting, implementation, and even post-hoc evaluations of program effectiveness. About 70% of Washington based interest groups opened their offices after 1960. This proliferation was due to many factors, particularly government encouragement of interest group formation and the larger government agenda. The largest interest group is the government itself.
Public employee unions are the most powerful of the pro-government interests. Public employee unions’ influence on both Congressional and executive branch policy makers is substantial, with four far-reaching effects. They heavily support Democrats, who typically seek to expand government, their benefits and work rules raise program costs, they oppose the budgetary reforms required for the nation’s long term fiscal solvency and, most important of all, public employee unions are the strongest interest group pressing for a larger government agenda. Their primary mission is to increase the number, security, compensation and working conditions of government jobs. These goals conflict with fiscal balance and policy effectiveness.
ACCEPTANCE OF SOCIAL AND ECONOMIC INEQUALITY
The causes of increasing inequality include: growing educational disparities, assortive mating, competition from low wage countries, immigration’s effect on low-skilled Americans, lower rates of marriage and intact families, and more economic gains from better education.
Americans are far more religious and patriotic than citizens of any other liberal democracy. Religious organizations’ provision of many essential public goods and social services has helped make possible America’s commitment to limited government. Our federal system enables states and localities to experiment with their own programmatic approaches to public issues. The successful 1996 welfare reform was modeled on that of several successful state policies, particularly Wisconsin.
Ethnic and demographic diversity can degrade social capital by encouraging people in diverse communities to withdraw from civic life.
The nation is becoming more difficult to govern because of our government’s difficulty in properly aligning incentives, rationality, and credibility, all of which are essential to government’s ability to handle an ever more complex social and policy environment.
(The note on the bottom of page 118 says Congress can always alter or abolish entitlements.)
Public opinion exercises more control over policy decision-makers than ever, because the gap between the education level of the citizenry and the policy makers has shrunk.
Civil society refers to the private actors, both nonprofit and for profit, that stand between the government and the individual – also called “social capital”. Our religious tradition and the private philanthropy it fosters are very important parts of this.
An unfortunate, relatively recent development has seen many major charities become increasingly dependent on the federal government – Planned Parenthood, AARP, the Urban League, La Raza and Catholic Charities are major recipients of federal aid and all have become major advocates for expanded programs.
Obviously, government programs can “crowd out” nonprofit providers dependent exclusively on private donations, and government support alters the relationships between the providers and their clients, making them more bureaucratic and morally ambiguous.
Chapter 5 – Incentives and Collective Irrationality
Policy success depends on at least 6 attributes. First, incentives must be properly aligned. Second, the instruments for policy implementation must be rational. Third, the information on which the policy is designed must be accurate and unbiased. Fourth, the programs must be adaptable to the changing environment. Fifth, the policy must be credible to those involved. Finally, the programs must be managed well.
For structural reasons, all six of these are in short supply in government. Markets do a much better job with incentives, rationality, information generation, adaptability, credibility, and management than can government. This contrast highlights the systemic conditions that doom so many government policies to failure. Two features usually either lacking or deformed in government are incentives and rationality, both at the individual and the collective levels.
Public choice theory holds that officials’ behavior is best predicted by assuming that self-interest is their primary motivation and that policy oriented actors embed their self interest in policy and programs to create and preserve governmental institutions and practices.
Rational self-interest drives most political behavior most of the time.
Ordinary citizens have little or no rational incentive to participate actively in political activity. Those who do so disproportionally usually have large focused stakes that can be protected by joining an interest group with the same stakes.
Legislatures shape their agendas to deliver what favored interests and supporters (those who can help their re-election) wish. Congress is organized to serve its members electoral interests.
Agency officials use their authority to increase their political and budgetary support.
The political effectiveness of a group depends on its ability to manipulate incentives so as to overcome structural political obstacles. Mancur Olson’s book, The Logic of Collective Action, explains this.
Officials have powerful incentives to provide voters and interest groups with short term benefits and hide the long term costs of those benefits. Politicians have short time horizons tied to the electoral cycle. The tendency is to exaggerate current benefits while hiding future costs.
There is also a tendency to legislate unfunded mandates, and to shift costs to non-constituent taxpayers and to state and local governments.
The political dynamics of a public policy depend on how it distributes its benefits and costs among voters and groups. The Politics of Regulation, by James Q. Wilson, covers this subject.
Much political activity consists of narrow interest log rolling at the expense of taxpayers. 80% of the cost of The Farm Bill is food stamps.
Moral hazard is a major source of incentive based programmatic failure. Moral hazard is the incentive to take on more risk because the cost will be borne by others. Fannie May and Freddy Mac have two toxic moral hazards. They pressured and subsidized lenders to make subprime loans, and they incentivized high risk borrowers by allowing them to walk away from their underwater mortgages.
The government learned the wrong lesson from the fiasco. The Dodd- Frank reform increased moral hazard by broadening Wall Street’s safety net. Classifying the largest financial institutions as systemically important and too big to fail gave them hugely advantageous marketing and credit advantages. Second, Dodd-Frank creates a system for “orderly resolution” of insolvencies that makes future bailouts more likely. The Federal Reserve’s policy of keeping interest rates so low for so long, and of not raising margin requirements, invites excessive borrowing, speculation, asset bubbles, and future inflation, while harming savers.
Since 1990, Congress has required the massive federal credit programs to systematically underestimate and misrepresent their true costs by accounting for loans without factoring in default risk. This creates two kinds of moral hazard. It encourages government to lend too much by treating its loans as risk free, and encourages high risk borrowing by those apt to default. The student loan program is a good example. Obamacare encourages moral hazard by encouraging the young and healthy to delay buying even subsidized coverage because they know they can buy it later despite preexisting conditions. Government health insurance structure reduces the costs of self-destructive behavior. Moral hazard is common in government programs targeted at the poor because they can receive benefits only by remaining poor. Benefits either phase out at a steep rate or stop abruptly, thus setting a very high work discouraging marginal tax rate. Any social transfer increases the net value of being in the condition that prompted the transfer. Poverty programs have encouraged some unmarried women to drop out of school or the work force to have children they could not otherwise afford, though the 1996 welfare reform reduced this incentive.
An important moral hazard for states is the incentive to maximize federal dollars at little or no cost to them, Food Stamp eligibility, for example, where the federal government pays 100%. Federal matching dollars make local projects like urban transit seem far cheaper than they are. This intergovernmental incentive structure helps explain the explosion in the cost of federal disability insurance where the government again pays 100%. These incentives explain why SSDI recipients have tripled since 1990 despite a healthier workforce. The obvious ameliorating remedy is to have the states pick up at least half the cost.
Non-market failure is a systematic, incentives based tendency of government policies. The most important systemic non-market failure occurs because the goals of the policy makers and the bureaucrats running the programs have motivations that are not aligned with the agencies’ public purposes. The most obvious internality affecting government failures is budgetary growth, which substitutes for the profit criterion as a measure of performance. You have not only bureaucratic self-interest, but external political pressures to expand the coverage of benefits. Bureaucratic expansion is a very powerful tendency. The most pervasive internality is the disconnect between a policy’s public costs and its private costs. The private costs may vastly exceed the public outlays and are mostly ignored by policy makers. Charles Wolf at RAND has done excellent work analyzing non market failures (see pages 150-153). Government officials usually act as if guided by their single mission to the exclusion of all other concerns.
IRRATIONALITY
The transformation of individual rationality into collective irrationality is endemic to politics and to policy making. Markets punish irrationality, politics does not; it often magnifies it. Studies have found appalling levels of public ignorance about the most basic facts of government and policy. Irrational voting behavior affects many important election outcomes.
Group polarization theory holds that when groups deliberate together, their decisions tend to be more extreme versions of their pre-deliberation views. Ideological bias affects the public’s views on a large number of policy issues. We all have a tendency to reject evidence that contradicts our existing philosophical commitments. The data show that the median voter can make more rational political choices than the median nonvoter. This shows the folly of mandatory voting systems and helps explain the miserable results of Greece and Argnetina.
Chapter 6 – Information, Inflexibility, Incredibility, and Mismanagement
Market\s are much more efficient than government in obtaining and using relevant information. Sound policies require good information about the nature and causes of a problem, about the costs and benefits of various possible solutions, and about the effectiveness of current policies versus potential proposed ones. Inadequate information about social problems results in the policies often being directed at the symptoms instead of the causes. Government’s information is usually poor. For example, poor information systems have hobbled immigration enforcement and policy making. Homeland security has refused to comply with the Congressional demand for a reliable metric for assessing border security. Many federal agencies have neither digitized nor competently managed their own information systems, much less coordinated them with other agencies that need the information. These obstacles to well informed federal policy are vastly magnified by the centralization in Washington of most key decisions, despite the fact that the information needed is located elsewhere.
Of course, central policy makers can’t gather and aggregate all the dispersed information into effective policy regardless of how effective their systems are. In The Constitution of Liberty, Hayek showed why officials’ efforts to synthesize this dispersed information and then massage it into coherent policy is doomed to failure. Only markets can process such an immense amount of information and convert it into a workable “spontaneous order”. Centralized decision-making will inevitably get it wrong. The complexity is far too great for any centralized intelligence.
Members of Congress receive huge quantities of information, most of it highly biased and selective. Their main sources – lobbyists, party organs, and staff, are self-interested, partisan, and pre-committed, not objective problem solvers. Members’ positions on many important issues are predetermined by their party affiliation and are usually not open to significant revision in light of better information. They have little time to read or think deeply about issues.
An increasing amount of legislation is bundled into enormously complex omnibus bills, aggravating the problem. Most state legislatures limit this practice through single subject rules.
Even the most systematic of government agencies lack the quality and quantity of policy relevant information that markets quickly, cheaply, and automatically generate, integrate, and assess, and agencies seldom collect performance data on their programs in a systematic fashion. Both Hayek and Wolf explained the poor fit between the complexity of social facts and the simplistically distorted information that Washington officials rely on for their decisions and propagate to the public.
The challenge of policy change adaptability is vastly magnified by the short time horizon of elected politicians. They apply a very high discount rate to the future, minimizing or ignoring long time effects. These short time horizons have distorting effects on policy and the incentives render longer term policy planning impossible, which creates paralyzing uncertainty on the part of business heavily affected by the policy. Social change can confound existing policies and undermine their rationale. The federal statute books are full of programs for which costs and other parameters have greatly increased while the original rationale has eroded, and most are impervious to fundamental reform or repeal.
We desperately need to change immigration policy to systems like Canada and Australia whose more flexible systems compete with us for highly skilled immigrants. We are still restricted by the 1965 Hart-Cellar law. Immense technological and labor market changes have transformed the policy challenge.
INCREDIBILITY
Unless the government can make a persuasive case that amnesty is a one-time-only policy, awarding amnesty simply encourages more people to come illegally in hopes of a future amnesty. The credibility problem affects almost all public policies and the problem is far worse for government than for private actors. The National Academy of Sciences reports that “lack of sustained policies” is one of the biggest barriers to attracting top scientific talent to government research.
Obamacare amended the Medicaid program to drastically increase the costs to the states, but the Supreme Court struck down the provisions that would have eliminated a state’s Medicaid funding if it declined to participate in the Obamacare exchanges. It is extraordinarily difficult for the federal government to thread the needle between abrupt policy changes that violate government created expectations, and maintaining the status quo long after new conditions require a change.
MISMANAGEMENT
There is massive endemic federal mismanagement, which is increased by program fragmentation and overlap. There are 47 federally funded job training programs administered by 9 different agencies. Improper federal payments were estimated at $115 billion in 2012 of which Medicare and Medicaid accounted for over $50 billion.
Document fraud is rife in programs like immigration control. The legalization programs of 1986 experienced widespread fraud, particularly in “special agricultural workers”. Congress refusal to require a secure national identity document practically guarantees widespread fraud. Government programs are further handicapped by chronically retrograde, inferior information systems.
Government contracting is particularly vulnerable because procurement officers lack management skills. Federal mismanagement is a chronic problem.
Chapter 7 – Markets
Markets are a civilizing, socializing, and pacifying process – even as they wreak “creative destruction” with remorseless efficiency. Markets present formidable obstacles for policy effectiveness. This chapter is on how markets distort government policies. Government programs often have a “crowding out” effect on markets. It’s hard to compete with those that are subsidized. Objective studies of government programs often show that the market would more simply replace government activity and produce different, and sounder, underwriting decisions. For example of a “crowding out” problem, Obamacare will cause many small businesses that provide health insurance to drop the coverage in favor of the government program. Government’s poverty policies reduce and distort private charity. Benevolence has greater moral value coming from voluntary sources rather than from coerced taxation. In helping the poor, charities emphasize, far more than government, individual character development, higher behavioral expectations, and the value of reciprocal obligations.
Private firms can outcompete government for the best workers.
The market almost always performs more cost effectively than government. Medicare Advantage encourages seniors to enroll in private health insurance rather than government-run Medicare and now serves more than 25 percent of Medicare beneficiaries.
MARKETS FRUSTRATE MARKET-PERFECTING POLICIES
Seeking to fine-tune interest rates by manipulating the money supply is inherently problematic. Fiscal policy has obviously failed as deficits will explode unless radical policy changes are enacted. The possibility that government taxes and regulation will encourage domestic firms to move off shore is a continuing and increasing threat. The political influence of market actors in heavily regulated business is pervasive. The mutual dependencies of regulator and the regulated are great, and the need is great to reduce these dependencies for the more powerful companies with great political and agency influence. Mutuality of influences and interests are fundamental aspects of regulatory politics.
Public interest organizations – labor unions, environmental groups, civil rights organizations, etc. promote much regulation that the broader, more diverse group of regulated companies are less able to manipulate.
More powerful government draws more private money into the political system, mainly for self-protection.
Officials who run the regulatory agencies tend to cultivate and sustain the regulated industry.
There are three kinds of institutions and practices most useful for organizing and motivating human activity – legal rules, social norms, and markets.
Chapter 8 – Implementation
The more complex the program, the more moving parts it has and the more agencies it involves, the less likely it is to succeed. The success of any policy requires that its designers know which factors and conditions are likely to cause which consequences. Such knowledge is always inadequate when dealing with social behaviors, and government’s policy coherence is undermined by irrationality, skewed incentives, lack of reliable information, policy rigidity, lack of credibility, and mismanagement. Policies can’t be effective unless they solve the implementation problems associated with policies designed to affect markets. Sound solutions require that policy makers know how markets work and how effectively, if it all, government policy can manipulate them. Policy makers often exaggerate the extent of market failures and adopt corrective programs that make them worse.
Historically, immigration has greatly enriched American life and promoted economic vitality, but recent policies have failed egregiously. U.S. immigration policy has objectively failed regulation of externalities.
Government has compelling reasons to regulate negative externalities like pollution, so its most important externality regulation is environmental.
Except for BART, every U.S. urban rail transit system actually reduces social welfare.
The informal sector is largest in countries where the cost of legal compliance is the greatest. The informal sector expands as government regulation expands. The government’s war on drugs has inflicted immense collateral damage on American society and on source countries.
SUBSIDIZNG MARKETS
Government often seeks to alter market outcomes by subsidizing private actors. The student loan program almost doubled since 2008. It’s a classic example of distributive politics – broad coalitions that concentrate benefits and disperse costs. The program is an engine of moral hazard and student loans have the highest delinquency rates of any federal credit program. Apart from moral hazard, the program has produced perverse and unforeseen consequences, primarily in tuition increases. Government officials are notoriously disinterested in assessment data.
Chapter 9 – The Limits of Law
Law affects virtually all behavior and all relationships and is the dominant instrument of public policy. Modern public law – the body of statutes, agency rules, and court decisions, – assumes redistributive and regulatory roles that are more expansive than ever before. Never before has government concerned itself so minutely with the detailed interactions of daily life. Law’s contemporary reach was not inevitable.
The old system demanded affirmative justification for more public law because its deepest commitment was to individual freedom and autonomy. It preferred to risk too little law than too much. The system was transformed by the Progressives in the New Deal and the Great Society era and by the rights revolution that began in the 60’s.
THE SIMPLICITY-COMPLEXITY TRADE-OFF
A legal system is complex to the extent that its rules, processes, institutions, and supporting culture possess four features – density, technicality, differentiation, and uncertainty or indeterminacy. Dense rules are those that are numerous and encompassing – seeking to control a broad range of conduct. (p.286).
The pervasive delegation of discretion by Congress to agencies and to courts has produced a legal landscape more dense, technical, institutionally differentiated, and indeterminate than if the legislature had simply made the rules itself. The administrative state resulted from the effort to regulate areas of activity previously governed by informal or contractual norms. Regulatory law brought more technicality, specialized lawyering, highly differentiated agencies, etc. To illustrate, before the Voting Rights Act of 1965, federal voting rights law was relatively simple. Today, federal regulatory voting law is highly detailed and reviews thousands of state and local election laws involving the structures of representation, voting rules, municipal finance, voter identification, and much more. The increasingly complex public law has penetrated fields that were formerly matters of private law. Employment and benefits law, for example, is now a dense mixture of overlapping legal structures.
Before the age of statutes, the administrative state and an aggressively policy making judiciary, American lawmaker’s policy goals were generally modest. Legislatures’ principle goals were to establish public policies to support the system and common law courts kept to a system of judging that respected stare decisis and legislative intent. The New Deal changed all that. The New Deal and the Great Society programs along with the Rights Revolution metamorphosed American government into the new system. New legislative goals implemented by administrative agencies include health and safety, equal opportunity, income redistribution, financial security for the elderly, stabilization of markets, etc. These transformations of public and private law invited judges to abandon formalism. Judges embraced judicial policy-making in many areas. Once judges abandoned formalism and adopted a policy oriented style, goals multiplied and the multiplicity of goals necessitated new legal doctrines to deal with them.
In tort law, the field exploded with litigators inventing the doctrines of enterprise liability and so forth, and the increase in judicial goals led to judges adopting decisions that vastly further complexify the system. By requiring judges to balance numerous, diverse, and inevitably conflicting policy goals, these new doctrines enormously complexify both the legal landscape and the agencies which the laws influence.
The interpretation of legal norms has become far more complex and difficult. The influence of postmodernist theories on legal thought and emphasis on interpreting norms contextually and delegitimation of traditional sources of authority has thrown the whole field wide open.
Judicial influence over policy making has been enormously expanded by multiplying courts’ opportunities to interpret and apply the law. In a society that values negative liberty, the penetration of law into every corner of human life is a source deep resentment. Since the complexity of law advantages some groups and disadvantages others, cynicism about the legal system is bound to result, and since an effective legal system is so highly dependent on voluntary compliance, simplicity and understandability of law is tremendously important.
Legal ambiguity reduces laws effectiveness by increasing the power of the final interpreter, the court system and, of course, breeds litigation.
Private class actions are largely unknown outside the United States. They affect governmental power and policies in fundamental ways. They are shaped by the private incentives of entrepreneurial lawyers and their clients – not by public values and priorities of politically accountable policy makers. Private class actions may either reinforce public values or undermine them. Complex procedures present endless possibilities for gaming.
The substance of public policy is the province of politicians, economists, policy analysts, and interest groups, but the process is the playground of lawyers. A lawyer can challenge the adequacy of an agency’s procedures, or its compliance with them, more easily than it can attack its policies and decisions on substantive grounds.
Chapter 10 – The Bureaucracy
The federal bureaucracy’s power is best measured, not by the number of employees, which has decreased since 1970, but by its discretionary authority, the ability to make policy not spelled out by laws. This power has grown enormously through congressional delegation in three areas: (1) subsidies to particular groups and organizations; (2) conditional fiscal transfers to state and local governments; and (3) regulation of various sectors of society and the economy.
The number of political appointees in the executive branch has increased dramatically to more than 3,000, of which 1,000 are agency heads. They enable a new president to reach deep inside every corner of government and put loyalists in charge. Feelings of hostility and anxiety toward our federal bureaucracy are rooted in American respect for individualism and our traditional political institutions and culture – and this is unique.
The federal career service is in serious crisis with a long term decline in quality, accountability, vision, and professional commitment. This chapter analyzes the main causes along ten themes: (1) congressional influence over administration; (2) legalism; (3) leadership ;(4) layering; (5) compensation, status, performance, and morale ;(6) discipline; (7) senior executive service; (8) lower-level compliance; (9) contracting out; and (10) isolation. (311)
Virtually all advanced liberal democracies are organized as Westminster type systems, in which the executive and legislative branches are under the unified control of the party that has won a majority of seats in the legislature (parliament). This means that little separation of powers exists between the legislative and executive branches.
The American system is very different. Here there is a radical separation – constitutionally, politically, and practically, between the powers of the president and the administrative agencies under his authority and those of Congress. This radical separation is of foundational importance. The American Congress has no close counterpart anywhere in the world in the autonomous power that it exercises as a collective entity. Congress has the constitutional power, numerous levers of policy influence, and the political incentives to compete fiercely and incessantly with the president to shape the administration and its policies, and Congress often wins. Through the legislative process, Congress controls the structure of federal agencies and their budgets. The bureaucracy is far more the creature of Congress than of the administration and congressional committees frame much of the political reality for the bureaucracy. The fragmentation of congressional sub-committees creates multiple points of access for the administrative system.
Congressional influence affects every federal policy. The vast growth of congressional staff, along with its technical and policy specific expertise, has shifted the balance of power for control of the bureaucracy in favor of Congress.
Although citizens blame the bureaucracy, it is the legislative and judicial lawmakers who are most responsible for the red tape.
The state of the federal service has been declining since Jimmy Carter became president.
Between 1961 and 2009, the number of management layers in the average cabinet level agency jumped from 7 to 18. Titles have multiplied like kudzu. The average federal employee received guidance through nearly 60 layers of decision makers and there is great tension between top civil servants and political appointees as they seek to convince each other to adopt their different perspectives on policy making. Leaders access to technical expertise declines as the layering between them and their career subordinates increases. Except at the top levels, federal employees are paid more than they would earn in private sector jobs, but top federal managers are paid much less than their private sector counterparts. A key question – do the right young Americans want a federal job? The answer is no. The federal service comes in last in almost every indicator of employment preference.
None of the resources needed to perform their jobs well are sufficiently available to members of the federal bureaucracy, especially at the middle and lower levels. To get the right people, the opportunity to develop skills, accomplish something worthwhile, and gain public respect for the work must be available.
It is almost impossible to fire, demote, or suspend civil service employees.
The consequences for government performance of having this increasingly demoralized, poorly equipped, marginalized, publically scorned, and literally undisciplined workforce are obvious. These employees are the ultimate instruments of our public policies.
Chapter 11 – Policy Successes
A successful policy should be socially beneficial, cost effective, meet its performance goals, and serve those who need it most.
Medicare is not a policy success despite its popularity. It is very cost ineffective compared with plausible alternatives and it is fiscally unsustainable.
Many of the government’s successful policies have been in the areas of defense, national security, and foreign policy, but the book’s focus is on domestic policy.
The Homestead Act of 1862 was a very successful policy as was the Morrill Act of 1862 which established the land grant colleges.
Social Security has been another successful policy. It has largely eliminated poverty among the elderly.
The GI Bill was hugely successful.
The interstate highway program has been successful.
No law has a greater impact on the long term character of American society than the 1965 immigration law, The Hart-Cellar Act. It repealed the racially and ethnically based national origin quotas that had been in place since 1921 and eliminated discrimination on the basis of race or national origin, resulting in an enormous influx of immigrants from Latin America and a smaller, but still large number, of Asians. The immigration wave since 1965 has transformed our society in countless ways. The law also inadvertently encouraged large scale illegal immigration. Legal and illegal immigration are linked in several ways and large illegal populations create pressure to give them legal status.
The Welfare Reform Act of 1996 was quite successful because the law pressured states to adopt aggressive policies to restrict cash benefits to poor parents capable of, but not working. Work requirements were stringent and the new law imposed financial penalties on states that failed to require beneficiaries to comply, and gave states flexibility to create their own sanctions. The beneficial results were much more dramatic than predicted – almost every index of child wellbeing improved. The 1996 law worked because it created strong positive and negative incentives for the most uneducated, unpromising welfare recipients to join the work force. Poor mothers responded to these incentives much more resourcefully than policy makers had expected.
The National Institutes of Health has been extremely beneficial in the research it has fostered and in coordinating medical information.
The successful programs of a redistributive nature all involved relatively simple centralized administration and correspondingly few implementation obstacles. Social Security is essentially a data management and check writing operation.
Programs that provide public goods such as communications, networks, basic research, transportation and infrastructure are a natural province of government, particularly the federal government.
The NIH supports biomedical research that private firms will not adequately fund. This research has been hugely beneficial as has the research done by the Defense Advanced Research Projects Agency (DARPA). The national parks system has been very successful. The Earned Income Tax Credit (EITC) and 1996 Welfare Reform changed the incentives from bad to good so were successful. Most of these policies that turned out to be successful had a theme already endorsed by the dominant culture, so to succeed the programs only needed to engage the actors’ self-interest; they did not require creating new values or transforming deeply rooted behaviors.
A social program has a lot better chance of working if the government can just establish the entitlement with the appropriate incentive and let beneficiary self-interest do the rest. The U.S. enjoys its greatest policy successes when the government need only encourage individualism and creativity by various measures. Some programs can only succeed by altering behavior, but some behaviors are more tractable than others.
Policy success depends on what a programs’ participants must do for it to work. The vast majority of new criminal justice, social welfare, and education programs fail when measured by randomized field trials. Programs that are tempted to improve human behaviors usually fail. Only by adding mandatory work requirements did welfare reform succeed. The only program demonstrated to reduce crime rates in randomized field trials was broken windows policing, which changes the environment in which criminals operate. Experience shows that, for policy to succeed, we should try to change incentives and environments rather than trying to change people. It is much easier to alter people’s incentives than to change their values or character. Rigorous field testing is the only way to provide a reliable basis for prediction about government promoted behavioral change proposals.
PART 3
Chapter 12 – Lowering Government’s Failure Rate
Some of our worst policy failures are large, durable, visible, and fiercely defended, and account for a substantial share of total non-defense discretionary spending.
The essential criteria for policy success are efficacy, equity, and manageability. Most government policy failures are structural and the product of a deeply entrenched policy process, a political culture, a perverse official incentive system, inadequate information, mismanagement, implementation problems, and a weak bureaucratic system.
The law of unintended consequences rules attempts to alter sociopolitical structures in the face of immense complexity, uncertainty, and value trade-offs.
Any serious reform proposal should be subjected to analysis that clarifies the proposals conflicting goals, predicts the proposals downstream political and policy effects, and compares its benefits and costs to the status quo and other alternatives, all with special attention to the costs borne by invisible victims.
INCENTIVES
Congress is the single greatest institutional source of government failure. The General Accountability Office is one of Congress’ most valuable institutions. It provides auditing, investigation, advice, and assessments on a vast array of programs that often highlight problems in policy design or implementation.
Congress should have to comply with the same rules it is imposes on the public.
Policy makers face incentives that produce policies that favor small well organized groups over larger, but more diffuse ones.
Moral hazard is particularly important because it afflicts so many large programs and imposes immense costs on taxpayers. Fannie May and Freddie Mack are prime targets for reducing moral hazard along with screening criteria in the student loan programs. No one who fails to graduate high school should go on to college at public expense. All programs vulnerable to moral hazard should require significant cost sharing to reduce their incentive effects.
It is important to require each new program to specify and quantify its goals in advance and every new program should specify its desired outcomes whose attainment can be measured. It would help to discipline policy makers’ predictions to have sanctions against tactical overpromising. Congress should direct that all federal poverty assistance be provided whenever possible in the form of consumer vouchers. Obamacare’s problems could have been avoided by providing coverage with means tested vouchers instead of the inordinately complex, bureaucratic, mandatory system it used. Congress should make vouchers the default form of federally provided access to noncash benefits. Policy makers should pay far more attention to incentives. Competitive incentives can improve government performance by rewarding effectiveness and punishing failure. The government should incentivize not only scientific discoveries, but new effective techniques for policy design assessment, etc. Congress should also require each agency to analyze and publish its findings as to whether that service can be provided as well or better at the same or lower costs by privatizing it.
Congress should systematically reconsider whether regulated activities should be subjected to competitive bidding – Medicare for instance.
IRRATIONALITY
Many powerful forces combine to produce policies that are rational for the concentrated, organized interests that benefit from them and irrational from the perspective of the public that bears the cost of policy failure. The best antidote is to routinely require systematic, well publicized analyses of the consequences of existing and proposed policies – cost benefit and cost effectiveness analysis, etc. Congress should create a special OMB unit for this and include the independent regulatory agencies. This type of legislation has been introduced in the past.
The type of major regulations that are subject to cost benefit analysis requirements should be expanded. The more costly the regulation, the more rigorous should be the analysis. (Cass Sunstein has written a lot on this). Congress’ use of omnibus appropriations legislation, which prevents problem focused analysis, is another major source of irrational policy. Policies will be more rational to the extent that those who receive the benefits bear the costs, especially when the costs are made visible. Unity of cost bearing and benefit receiving puts the focus on the true value of the benefit. Most politicians prefer to exaggerate the size of the benefits and hide the costs. Low income consumers should be given vouchers rather than the multiplicity of aid programs.
INFORMATION
Less than 1% of government spending is backed by even the most basic cost effectiveness assessment. Less than one tenth of 1% of government healthcare spending goes to evaluating its effectiveness. Private sector decisions are increasingly based on hard data, but not government’s. Devoting even a tiny percentage of program funding to effectiveness assessment would pay for itself many times over. Agencies should be required to conduct randomized controlled experiments of proposed policy innovations before adopting them. These are now routine in business. The Office of Information and Regulatory Affairs (OIRA) should be required to research and design the tools for effective policy assessment. Policy makers fiercely resist these prospective assessments. Policy makers should experiment with “social impact bonds” (SIB) to test new policy approaches to changing behavior. Government should start using big data in a manner similar to what private industry does. Congress should implement the CBO’s recommendations for all federal loan programs, which currently systematically misrepresent the anticipated default rates.
RIGIDITY
Successful policy changes were: deregulation of telecommunications, financial services, energy, trucking, railroads, buses, and airlines; and welfare reform and at times there have been successful reforms of the federal budgeting system.
Some of the most needed reforms are agriculture, subsidy reform, budgeting reform, federal mandate reform, and tax reform. Government should, by requiring proponents of subsidies to propose offsetting reductions in other areas, put special interests in a zero-sum game where any costs they add must come at the expense of other special interests. Sunset provisions can help.
IMPLEMNTATION
Additional enforcement would pay for itself many times over in both tax collection and child support enforcement. A dollar spent in federal debt collection produced over $50 in recoveries in 2011.
THE LIMITS OF LAW
A law’s complexity should be tailored to the sophistication and cost bearing capacities of those who will have to interpret and implement it. Tax simplification reforms could yield vast gains in both efficiency and fairness. Tax simplification would enhance democratic morale and the government’s legitimacy. Small businesses should be exempted from many complex and costly regulatory requirements. States play an important policy role and are far more politically accountable and efficient and are likely to know better how to coordinate and deliver federally funded services through their own administrative apparatus.
Simple regulation is more effective. Much regulatory law needlessly suffocates initiative and expert judgment by both public and private decision makers.
CIVIL SERVICE BUREACRACY
The number of layers of management in federal bureaucracy should be drastically reduced and an up or out promotion system for federal supervisors implemented. Contract administration by federal employees is a hugely important part of federal policy making and implementation.
CHAPTER 13 – Conclusion
Most of our government failures are systemic, partially because of our decision making system and our unique political culture, which also have the benefit of limiting the scope of government power and of ill effects when it fails. Our system of government stifles socially desirable incentives, rational selection of ends and means, accurate, unbiased, up to date information, etc. Even well-crafted policy is vulnerable to powerful market forces. This is true particularly with tax and financial regulation where the market actors are better trained, compensated, motivated, and more experienced than their official adversaries who are relatively behind the technological curve. For these reasons the market compliance necessary for effective policy implementation depends far less on an enforcement and far more upon citizens’ internal sense of rectitude and belief in the legitimacy of the law. The most striking feature of government’s frequent failures is how deep and structural the causes are. The relationship between the government’s growing ambition and its endemic failure is rooted in an inescapable structural condition: officials’ meager tools and limited understanding of the complex social world that they aim to manipulate. The chasm between policy means and ends can only widen in the future. To quote James Q. Wilson, “if we are to make the best use of our laws and liberties, we must first adopt a sober view of man and his institutions that would permit reasonable things to be accomplished, foolish things to be abandoned, and utopian things forgotten.”
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