Tuesday, May 20, 2008

Understanding Government: Bureaucracy

Implementing any government program requires government employees. Analyzing the incentives facing bureaucrats is essential to understanding government.


The critical distinction between government and private organizations is that government can use force to fund itself, while private organizations cannot. Thus private organizations must be funded through contributions or mutually beneficial trade, while government funds itself through involuntary taxation.

Thus private organizations must be responsible for their finances in a way that government need not. Private organizations can waste money, but only to the extent that they have it. If they waste too much, they will go bankrupt. In contrast, the government can continue to waste money as long it can continue to extract money from taxpayers, which is pretty much forever. Thus the consequences for government misexpenditures of money are less certain or severe for those spending the money. The consequences are primarily felt by the taxpayers.

This is specifically true with respect to bureaucracy. Practically any government program requires hiring employees, spending money, and establishing rules. But employees can be unnecessary or incompetent, money can be wasted, and rules can be unnecessary or counterproductive. For a program to be effective, there must be some means of making these things work properly.

In the free market, this mechanism is the profit and loss system. Businesses are rewarded for succeeding, and punished for failing. No similar mechanism exists for government. Politics is at best only intermittently effective at producing good results, and is often counterproductive. This explains why government programs so rarely succeed at their stated goals.


Consider the different incentives facing government and private organizations regarding problem solving. A private organization must solve a problem to be rewarded. If it does not, it will not be patronized again.

In contrast, if the government solves a problem, it will not receive any more funding for that problem. But it if fails to solve a problem, it will most likely continue to be funded to "keep trying" to solve it. It may even receive more funding the worse the problem gets, providing a perverse incentive to exacerbate the problem. Government can thus prosper through failure. The best sort of problems for government are those that can never be solved, but must be fought forever.

Employees within a bureaucracy face their own perverse incentives. In the free market, money and prestige comes from a person's value at a solving problems. But in government, there is no way to determine how valuable someone's labor actually is. Instead, what usually happens is that a manager's compensation and status is primarily determined by how many people he has working for him, as it would seem untoward to have an employee making more than his boss. Thus managers have an incentive to increase the number of employees working for them as much as possible. This instinct exists in the private sector as well, but it is tempered by the need to make a profit. Of course, no such need exists in government.

Conversely, bureaucrats fight efforts to cut their funding. One common stratagem when cuts are proposed is the "Washington Monument strategy". That is, rather than cut waste, unnecessary spending, or employee salaries, threaten to cut valuable or popular services. This often succeeds in deterring any cuts.

Another common feature of bureaucracies is that they usually do not cooperate well with each other and often fight each other for jurisdiction. This too can be explained in terms of incentives. Bureaucracies have little incentive to assist other bureaucracies, since they are all competing for funding. Being helpful and cooperative would aid another agency at your own expense, while hoarding information and being unhelpful makes it more likely that only you are capable of addressing a problem, and hence that you will get more funding. The larger jurisdiction an agency has, the more problems it is tasked to solve, the more funding it is likely to receive. In contrast, private organizations compete, but they also cooperate when it is mutually beneficial.


Because government does not face the same constraints as a private organization, its employees are likely to be less capable than those in the private sector. This is because government does not need to make a profit and does not benefit from solving problems. More capable, enterprising people are more likely to seek private sector employment and be rewarded for their efforts. In contrast, less capable, less enterprising employees are more likely to seek government employment, as this work is likely to be more secure and less demanding.

This is not only another reason why government is likely to be less effective than the private sector. It is also a reason for government employees to be particularly tied to their jobs, since they are unlikely to find jobs that are as well-paying elsewhere.

Thus government employees have a strong incentive to organize a union. If this is not allowed, they have a strong incentive to lobby so that it is allowed. It is all but certain that they will lobby for "civil service rules" that make it difficult, if not impossible, to fire an employee. Politicians and government managers have much weaker incentives to resist such demands, since they are not spending their own money. Thus such rules will tend to be approved, and government will become even less effective at solving problems.

The government employees union will also certainly lobby for higher pay and benefits for government employees. It will tend to succeed, since as before politicians are not spending their own money. Of course, private sector unions also lobby for higher wages and benefits. But private businesses are constrained by the need to make a profit. Also, there is competition is the private sector to weed out any companies made too inefficient by unions. But this does not occur in government. Thus government employees will tend to make more than they could in the private sector, with their pay coming from taxpayers.

Government employee unions will also fight tooth and nail against any attempt to cut government spending, no matter how modest or reasonable. Those attempting to cut government spending, whether principled or pragmatic, do not have the same incentive. Thus government programs are rarely ever cut, and many programs that are clearly outdated or anachronistic continue by inertia.

Further, when bureaucracy gets large, in a democracy, government employees can form a significant voting block. They will almost certainly be better organized than taxpayers. Thus any politician who attempts to cut government spending or amend civil service rules risks losing office in the next election.


Another common characteristic of bureaucracy is the proliferation of rules and regulations, commonly known as red tape. Any significant organization will have rules and procedures, but government has no profit motive to keep them in check.

Further, government employees have to do something with their time to maintain the impression of value. One of the safest things to do is to develop more rules and regulations. These can always be excused as necessary to preserve safety, document spending, etc., whether or not they do any such thing. These rules are all too likely to be counterproductive, since government employees have little incentive to make them work well. Thus more bureaucracy tends to make problems worse. Thus spending more money on a problem will often make it worse, not better.

Bureaucracy is practically synonymous with being unhelpful. Once again, incentives explain the situation, though the reason for this may not be obvious initially. In this article by Gary North, a bureaucrat explains how this works.

A woman who was reputed to be the longest-serving bureaucrat in Washington was about to retire. This appeared to be an ideal human interest story, so a reporter from the "Washington Star" – R.I.P. – was sent to interview her.

Inevitably, the reporter got to the standard question asked of any long-term survivor of anything. "How did you last so long in this department?" Because she was about to retire, she decided to reveal the fundamental secret of survival that has governed every bureaucracy since the era of the Middle Kingdom Pharaohs.

"No matter what anyone from outside the department asked me if he was allowed to do, my answer was always 'no.' "

The reporter, not realizing that he was close to the philosopher's stone of bureaucratic management, asked why. Her answer will ring true down through the ages. It will still be recognized as the central operational principle of all government bureaucracies on the day that the four horsemen of the apocalypse mount their stallions and ride. She said:

"I said 'no' initially because, if I was later forced by the rules retreat to 'yes,' I made a friend. But if I was forced to retreat to 'no' after having said 'yes,' I made an enemy. Around here, you don't want to make needless enemies."

Politicians perennially talk of reforming government, making government work, streamlining bureaucracy, cutting waste, etc. However, this is unlikely. To be sure, it is possible for a particularly forceful and effective administrator to cut through bureaucracy and make government more effective. There are some rare examples of this occurring.

But the relevant question is not whether this is possible but whether it is likely. For all the reasons listed above, including the difference between government and the free market, perverse incentives, and government employee unions, it is unlikely that such people will be in charge of government agencies most of the time.

For these reasons, bureaucracy is pretty much unreformable. Individual cases of waste can be exposed, and government agencies can sometimes be pressured into making some reforms, but these victories are always temporary. This does not make exposing bureaucracy a pointless cause, but it means that the effect of such efforts is limited.

The only real options are either to accept bureaucracy or to abolish it. Any proposal to use government to address a problem should consider the cost of bureaucracy and the problems associated with it. Bureaucracy is one of several significant reasons why the free market is likely to be more effective in solving problems. Anyone who wishes to solve problems should work to minimize government power as much as possible.

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