Why Government Fails So Often: And How It Can Do Better (11 page)

*
Claims about policy effectiveness, which I use as a synonym for success, sometimes cite statistics, much as the devil cites Scripture. I shall often do the same, while being mindful of Thomas Carlyle’s warning, “Statistics are the greatest liars of them all,” and Benjamin Disraeli’s cynical quip, “There are three kinds of lies: lies, damned lies, and statistics.”

*
Moral hazard—the propensity to take on more risk when one knows that one will not bear much of the expected cost of that risk—is discussed, with many examples, in
chapters 5
and
12
.

*
An interesting current example, though local rather than federal, is evidence that San Francisco’s ban on plastic grocery bags on environmental grounds has led to an increase in bacteria-caused illness from reusable bags, the main substitute for the plastic ones. Jonathan Klick & Joshua D. Wright,
Grocery Bag Bans and Foodborne Illness
, University of Pennsylvania Institute for Law and Economics Research Paper No. 13–2, November 2, 2012.

*
For example, Milton Friedman once said, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.” But as Friedman would surely concede, this shortage would benefit sand suppliers!

†
An estimated 46 percent of American households did not pay federal income taxes in 2011, although many paid federal payroll, excise, and other taxes (a qualification that candidate Mitt Romney failed to make in his infamous “47 percent” remarks in a taped briefing of his donors). See Chuck Marr & Chye-Ching Huang, “Misconceptions and Realities about Who Pays Taxes,”
http://www.cbpp.org/cms/index.cfm?fa=view&id=3505
.

*
Welfare economics’ basic efficiency criteria—Pareto superiority and Pareto optimality—exclude situations, which are universal in the policy realm, when a change makes even one person worse off than before. A Kaldor-Hicks-efficient policy, defined as one that generates net benefits such that gainers
could
compensate losers (even if they don’t do so; hence the term
potential Pareto
) calls for CBA, discussed below. See Edith Stokey & Richard J. Zeckhauser,
A Primer for Policy Analysis
(1978).

*
I term such people “invisible” or “silent” victims when, as is often the case, the policy’s causal responsibility for their harms is opaque. I say more about invisible victims below.

*
Ideally, policy makers would look across the government as a whole in asking where taxpayer dollars would do the most good. In principle, the government’s overall budgetary process—conducted in the congressional budget committees, the Congressional Budget Office, and the Office of Management and Budget (OMB)—is designed to encourage such synoptic decisions. In practice, however, the key decisions are anything but synoptic. Orchestrated by Congress’s substantive and appropriations committees (whose membership is determined with a view to their narrow constituency interests), the OMB’s sectoral program offices (which divide up the budget by program and function), and the executive branch’s individual, subject-matter-oriented departments and agencies, the process instead focuses narrowly on discrete programs and policy areas. No one actually takes responsibility for target efficiency in the government as a whole.

*
They are not universal, however. NASA’s Mars Rover turned out to be faster, cheaper, and better than projected. Some cost overruns are more avoidable than others. In the case of agricultural subsidies, unpredictable weather conditions may affect what the government must pay. When a procurement agency purchases weaponry or other products or services, it may demand costly design changes or an accelerated production schedule after the initial contract cost was signed.

*
The ax may also be financial. For example, the main credit rating agencies for financial instruments (Moody’s, Standard & Poor’s, and Fitch Group) used by a number of government agencies and regulatory programs were paid by the companies that they were assessing. This not only constitutes a manifest conflict of interest but by most accounts contributed significantly to the financial crisis that erupted in 2007.

CHAPTER 3

PolicyMaking Functions, Processes, Missions, Instruments, and Institutions

P
ublic policies are the product of five interacting factors. First, government must tailor its policy choices to the particular
functions
that it wishes to perform. Second, these policy choices are made through a variety of formal and informal
processes
. Third, policy makers assign
missions
to administrative agencies—indeed, often multiple and sometimes conflicting ones. Fourth, the policy that is chosen will pursue these missions by deploying some specific
instruments
rather than others. Fifth, public policies—when created and when implemented—are profoundly influenced by the
formal institutions
that surround and shape them. (Policy making’s political culture—its
informal
institutions, in a sense—is discussed in
chapter 4
.) Here I describe each of these five factors in turn, prefiguring the analysis in
part 2
’s chapters, which explore the reasons why, and the evidence that, government fails so often—and why it sometimes succeeds.

FUNCTIONS

The proper functions of government is a truly ancient question to which different answers have been given at different times by different commentators, including political theorists, economists, constitutional lawyers, and ordinary citizens. A conventional taxonomy of
federal government activity recognizes three discrete, basic functions: production, regulation, and redistribution.
Production
entails the creation of goods and services for public consumption. The most important example is national security, but it also includes the provision of physical and cybernetic infrastructure, biomedical research, and so forth.
Regulation
entails the prescription of rules, licenses, and other influence mechanisms designed to shape private (and subnational government) decisions.
Redistribution
entails taxation and subsidy of various private-sector activities. (Production and regulation both have redistributive effects as well.) Each of these three functions, of course, requires different kinds of policy choices and is shaped by a different political context.
¹

A gauzier, less technocratic conception of government function would emphasize another, more communitarian, function: its ability to define how citizens are connected to one another in a common venture. One is struck, however, by the erosion of these connective tissues even as government has expanded to occupy more and more social space. This erosion is likely both a cause and a consequence of the apparent, much-lamented (but also disputed) decline of social capital in our communities.
²

The common public school—the traditional site (along with the family) of civic education and socialization—is being challenged and in some cases replaced by private and hybrid educational institutions. Universal military service has been replaced by a wholly professional cadre that has less and less in common with the citizenry.
³
The U.S. Postal Service, formerly the hub of the national communication system, is in effect bankrupt, with most of its traditional functions now performed more efficiently by privately provided technologies. (In 2013, Britain decided to privatize its five-hundred-year-old Royal Mail.
⁴
) The management of water, power, communications, highways, and other community infrastructure has increasingly been privatized. The Department of Motor Vehicles, another site of government-citizen interface, is widely considered a parody of public service. The failure of so many of these connective institutions—partly due to technological changes—is likely both a cause and a consequence of public
dissatisfaction with government. Increasingly, then, Americans are raising the most fundamental questions about the state: what are its essential functions, which of those must be performed by politically accountable agents, and which can be performed better by nongovernmental institutions? These questions about the state’s functions are ancient ones; the answers have changed over time—and not in a unidirectional way. This inquiry leads to a third way to distinguish among governmental functions that I shall briefly discuss here. This approach asks whether in principle they are functions that government
must
undertake, that it
should
undertake, or that are
optional
(i.e., those that government might or might not be wise to undertake). I say “in principle” because the extent to which the government actually succeeds in any of these three types of activities depends on how it goes about designing and implementing them. As shorthand, I shall refer to these as
necessary
,
desirable
, and
optional
functions.

Necessary functions
. Political economy theory identifies two absolutely necessary functions of government: the
production of public goods
and the
control of spillovers
(or “externalities”). (I do not discuss here a third necessary function—the control of natural monopolies—because it is comparatively rare and technical area of government regulation that many experts in the field of regulated industries believe would be best left unregulated).
⁵
Simply stated, public (or “collective”) goods are goods or services that, once produced, are available to all in at least two senses: they can be consumed by all at zero marginal cost (they are “nonrivalrous”), and people cannot, at any reasonable cost, be excluded from consuming them (they are “nonexcludable”). If such goods are to be produced, government must produce them; no market actor would have an incentive to do so, as it could not exclude consumers and thus charge them for the goods’ costs.
⁶
The classic public goods are national security, clean air, and standardization of weights and measures.
*

Spillovers are different.
Negative
spillovers are produced when an actor has an incentive and an opportunity to impose on others some of the costs generated by its activity, or does so inadvertently. In either case, it will produce more of the activity than it would produce if it had to bear all the costs itself. Pollution is the paradigmatic example. In such cases, only the government can induce the polluters—through taxes, regulation, tort law, or other legal mechanisms—to internalize those costs so as to reduce them to a socially optimal level.
*

Desirable functions
.
Positive
spillovers occur in the case of “merit” goods—examples include education and public health—that confer benefits not only on those who directly consume them but also on other members of the public who do not. In such cases, the good’s social value is not exhausted by consumers’ demand for it, so less of it may be produced privately than is socially optimal. The government may intervene—through public provision, subsidies to private providers, or other legal techniques—to assure that more of it is produced than would be without government action, but these interventions will be subject to many if not all of the nonmarket (governmental) failures (to be discussed in
part 2
).
⁷

Although even libertarians accept that government must correct for these market impediments to public and merit goods, there is much disagreement about their precise contours: how much should be spent on national defense, which military systems should be installed, how clean the air should be, how that level of environmental control should be achieved, and so forth. Government provision of merit goods is even more controversial, reflecting disagreement about which goods are meritorious, the size of their benefits and costs, how their benefits should be distributed, how their costs should be controlled, and in what forms they can best be supplied. Education and public health are generally considered the most meritorious of goods,
yet bitter disagreements exist over which kinds of educational or public health programs should be established (e.g., debates over contraception or, in an earlier day, the fluoridation of water), the precise programmatic forms they should take (e.g., public provision, vouchers, regulation), and so forth. Another merit good—consumer or voter information needed to overcome knowledge advantages held by producers or politicians—also raises disagreements over how the desired information should be compiled and presented.

In both principle and practice, the particular level of government at which these goods should be provided is a separate question. In some cases of public goods or externalities—national security or interstate pollution, for example—citizens will support government intervention at the
federal
level, usually for efficiency reasons or concerns about “races to the bottom” among states competing for tax base and budgetary savings, as with the food stamps program (now the Supplemental Nutrition Assistance Program,
⁸
which is discussed in
chapter 11
). In other cases, however, the public may prefer that the intervention be undertaken at lower levels of government, usually for efficiency reasons (e.g., with land use controls) or localism values (e.g., with public education).

Optional functions
. Governmental intervention (if not its specific programmatic form) is almost universally accepted in the areas just discussed, but the same is not true of most other programs in which the competing advantages and disadvantages of politics and markets (and hybrid forms), and the soundness of particular interventions on a variety of policy grounds, provide an unending source of public controversy and partisan polarization. Here, the desirability of particular programs, and sometimes their very legitimacy (a slippery concept discussed in
chapter 1
), are highly debatable. For example, law-and-economics professor Saul Levmore argues, controversially, that government should sometimes regulate health and safety “internalities,” situations in which people who lack sufficient self-control to stop, say, smoking or eating junk food want the law to help them precommit to change their future behavior.
⁹