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Monday, October 27, 2014

Government Failure Is Baked In

Government Failure Is Baked In

By Veronique de Rugy
Reason.com
October 27, 2014

On July 14, The New York Times reported that scientists at the
Center for Disease Control and Prevention (CDC) had mishandled
dangerous strains of anthrax and bird flu, failed to follow correct
safety procedures after employees were exposed, and neglected
to notify the appropriate supervisors for about one month.

This is not the first time we've heard about lax oversight and
dangerous disregard at the CDC.

In 2006, for instance, the agency "accidentally sent live anthrax
to two other labs, and also shipped out live botulism bacteria."

Inadvertent biological warfare sounds bad enough, but the CDC's
errors are really just an amuse-bouche in the banquet of
government failures.

In the past year alone, we've seen the amazingly botched rollout of
Obamacare's website exchange, the Department of Veterans Affairs'
inept handling of health care for former members of the armed
forces, and the Internal Revenue Service politicizing right-wing
groups' applications for nonprofit status.

All of which took place against the background hum of death and
disaster in Iraq and Afghanistan.

While the nation's attention tends to be narrowly focused on the
day-to-day problems related to each of these disasters, they
comprise only the most recent and visible signs of the fundamental
flaws that plague government intervention.

In July, Brookings Institution scholar Paul Light published a report
on this topic, called "A Cascade of Failures: Why Government Fails,
and How to Stop It."

The study identifies 41 major federal screw-ups that took place
between 2001 and 2014, examines the official government reports
written in the wake of each, and classifies them by leading cause-
insufficient funds, bad policy design, or extreme difficulty.

Such an exercise requires a variety of judgment calls, and
sometimes Light misclassifies the problems behind the failures.

For instance, he blames the financial crisis on lax oversight rather
than government policies such as the Federal Reserve's low interest
rates; housing policies that encouraged larger, riskier mortgage
loans; risk-based capital rules for banks that incentivized them to
hold certain types of assets (including mortgage-backed securities);
and the existence of credit insurance.

Still, the paper is useful and packed full of information, including
the conclusion that the most common factor among failed federal
policies is poor design.

The underlying issue has long been observed by economists:
Government means bad incentives and insufficient knowledge,
regardless of the administration in charge.

The academic work of public choice economists, such as Nobel
laureates James Buchanan, George Stigler, and Vernon Smith,
helps us understand these government failures.

These economists have shown that even a government with nearly
unlimited resources and the best of intentions will enact "solutions"
that are not only unlikely to solve most of our problems but often
destined to make the situation worse.

Elected officials and bureaucrats, whether pure of heart or rotten
to the core, are not rewarded when they maximize taxpayer value.

Nor are they punished when they take unnecessary risks or fail to
minimize costs.

Quite simply, bureaucrats are rewarded for being good bureaucrats.

As Ludwig von Mises notes in Bureaucracy (1945):

"The bureaucrat is not free to aim at improvement. He is bound to
obey rules and regulations established by a superior body. He has
no right to embark upon innovations if his superiors do not approve
of them. His duty and his virtue is to be obedient."

Government officials are rarely fired, even when their bloopers
are catastrophic.

Who got a pink slip after the disastrous Obamacare exchange
rollout?

Not Health and Human Services Secretary Kathleen Sebelius.
She was carried out of office on a raft of praise and parties.

The CDC supervisor who wound up dousing his employees with bird
flu was shown the door, but it's unlikely that the blame truly rested
with a single individual.

It wasn't until at least 40 veterans died while waiting to be seen
by health care providers at the Department of Veterans Affairs
(V.A.) that Congress could muster the will to pass a reform bill
finally enabling the agency's secretary to fire incompetent
managers.

We can only hope that future secretaries will be competent enough
to adequately prune their pencil-pushing ranks.

The government is a famously poor steward of taxpayer dollars,
especially in its dealings with con-tractors.

How else to explain that a discredited company, CGI, won a massive
$678 million contract for building the glitchy Obamacare website
even though the firm was already infamous for its terrible job on
Canada's diabetes registry?

One key problem is that elected officials, voters, and bureaucrats
all operate with limited knowledge.

Private sector actors are far more likely to use the information
embedded in prices to guide their decisions.

When the price of a good or service goes up, businessmen with
an eye on the bottom line look for a cheaper substitute.

Government decision makers have no comparable mechanism.

They seek goods and services that correctly fill the specs provided
to them by their superiors, and they have very little reason to
worry about how much those things cost.

What's more, they cannot account for the costs that their
decisions create for others.

The twin problems of poor incentives and limited knowledge
create a recipe for persistent failure.

Interest groups exploit this environment to further their own
goals, often at the expense of the public welfare.

The U.S. Farm Bill, for example, is rubber-stamped by Congress
each time it comes for a vote despite vocal opposition from
economists of all ideological stripes.

This menu of insurance subsidies and price supports to farms
artificially raises your grocery prices while boosting profits for
big agribusinesses.

Corporate beneficiaries have the money and influence to
successfully shepherd each bill through Congress; average
Americans simply don't have the time or power to fight back.

Cronies relish concentrated benefits, taxpayers and consumers
suffer diffused costs, and politicians get to enjoy support from
both groups.

There are subtler forms of cronyism, too.

Occupational licensing, for instance, is sold to the public as
common-sense regulation to promote safety and quality.

In reality, the practice artificially raises the wages of incumbent
hairdressers and taxi drivers at the expense of low-income
Americans who seek gainful employment in those industries.

Interestingly, economists have suggested that politicians reward
interest groups more when they do so under the guise of working
for the public good.

This helps explain why the health care law was designed to expand
health insurance coverage rather than to improve health outcomes.

That difference benefited the insurance industry without
necessarily producing better and more affordable health
care supply.

It also helps explains why the benefits of Obamacare, like the
benefits of Medicare and Medicare Part D, accrue mostly to older
(voting) Americans at the expense of young and healthy citizens
who are less likely to vote.

One response to government failure is to argue that the problems
could have been avoided with more money or better leadership.

This sounds good in theory, but is very unlikely to be true in
practice.

Government institutions are inherently unable to perform complex
tasks, no matter how smart, compassionate, or well-funded their
bureaucrats may be.

Not only do many government programs fail to fix the problems
they were concocted to solve, but their solutions become failures
in their own right.

Consider the war on drugs.

This barbaric policy has not merely failed to curb drug consumption
and trafficking; it has destroyed hundreds of thousands of families,
increased the corruption in law enforcement, spurred a profitable
black market ruled by murderous cartels, and cost taxpayers
billions of dollars.

As the state grows and undertakes bigger projects, the trend of
failure will continue or even accelerate.

The best single way to limit government failure is to shrink the
scope and scale of government intervention.

Unless that happens, expect a huge tax bill if not a vial of anthrax
to show up soon in a mailbox near you.



Veronique de Rugy, Ph.D., is a senior research fellow at the
Mercatus Center at George Mason University and a monthly
columnist for the print edition of Reason.

http://reason.com/archives/2014/10/27/government-failure-is-
baked-in

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