Why Government Fails So Often: And How It Can Do Better (40 page)

Winston and colleagues estimated back in 1989 that replacing gasoline taxes with marginal cost congestion tolls and pavement-wear taxes, and building roads to optimal pavement thickness, would generate a welfare gain of almost $24 billion a year; adjusting the tolls to protect low-income drivers would reduce these savings only insignificantly. Large efficiencies could also be generated by policy changes in the seriously compromised air traffic control system, and in airport pricing (most of which is locally determined).
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A critical review of the Army Corps of Engineers management of waterway and
harbor construction projects has revealed egregious inefficiencies reflected in negative benefit-cost ratios, vast cost overruns, political manipulation of estimates, and the like. During the Bush administration, the corps was required to suspend work on some 150 congressionally approved water projects until the corps’ economic analyses could be improved.
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As for urban and intercity rail transit, Clifford Winston and Vikram Maheshri found in 2007 that, except for BART, every U.S. urban rail transit system actually reduced social welfare because of high capital and operating costs largely subsidized by taxpayers, underutilization except in rush hours, oversized vehicles, excessive labor costs, low labor productivity, lack of marginal cost fares, and inefficient service frequency.
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(Including environmental and safety gains had little effect on these findings.) The National Railroad Passenger Corporation (Amtrak) has seen a large increase in ridership (55 percent since 1997) and now carries a record thirty-one million riders annually.
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Its finances, however, are another story. Its political sponsors promised that it would become self-sufficient within a few years, but it has never even come close. Amtrak is a big money loser, partly because Congress requires passenger service in all but a few states, and many of those individual state services operate at big losses. After forty years of operation, Amtrak needed $4.4 billion in federal aid just in the last three years. Subsidies might be justified if it were a public good conferring large broad-based benefits unavailable through the market, but the benefits are localized. More than a third of its passengers travel in the relatively wealthy Northeast Corridor; it subsidizes operations elsewhere even more extravagantly. (Amtrak loses more than $80 million a year on its food/beverage service largely because of waste, employee theft, excessive salaries, and lack of oversight—despite Congress’s requirement more than three decades ago that this service pay for itself.
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) And even in the Northeast Corridor, Amtrak has not reduced travel times. As one analyst notes, it “isn’t any faster than the same train route was forty years and $50 billion in federal subsidies ago…. Amtrak built its high-speed Acela system from Washington to Boston on the premise that it would get riders between
major cities faster. Today, the Acela can get from Washington to New York in 2 hours 45 minutes at its fastest—or 15 minutes slower than the Penn Central Railroad could get a rider there in 1969 for an inflation-adjusted $102 per ticket.”
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Meanwhile, freight service, which was privatized in 1987, has flourished.
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One important reason why the kinds of federally funded public works projects discussed above are so much costlier than they should be is the Davis-Bacon Act, on the books since 1931, which requires that all project workers be paid locally “prevailing wages,” which has usually been interpreted by the Department of Labor to mean union-level wages and benefits. A recent analysis finds that the act inflates the cost of federal construction projects by 9.9 percent over market wage levels; repeal would have saved taxpayers $10.9 billion in 2010 alone.
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Governmental management of the public lands is also inefficient, and perhaps even corrupt in some cases, given its sale and rental of those lands to farmers, ranchers, foresters, and others at prices below marginal cost and market value—and often free of charge. Winston cites a
New York Times
article reporting that a developer acquired federal land that the government valued at $763,000 and sold it the very next day for $4.6 million.
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The National Forest Service’s fire management practices have long been criticized by silviculturalists and ecologists for actually increasing explosive conflagrations by overcontrolling burn-offs on forest floors.

The U.S. Postal Service is our largest public enterprise, with annual revenues of $65 billion. As noted in
chapter 2
, the causes of its vast inefficiencies—especially excessive wage and benefit levels, political demands requiring unneeded facilities and personnel, a skewed pricing system in which first-class mail subsidizes the other classes, and many others—are well understood. It more than tripled its losses from 2011 to 2012 (only partly due to a large accounting adjustment), has exhausted its borrowing limit with the Treasury, and is in default on its mandatory payments for retiree benefits unless Congress bails it out.
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Indeed, its losses are so large that it could probably subsidize e-mail services for residents of remote communities—a traditional justification for a public operation—and still save the taxpayers
money. Fortunately, other advanced countries provide a rich array of experiences in fundamentally reshaping their postal services for a more competitive digital age in which the vast majority of physical mail is commercial. Indeed, virtually every country in the European Union has done so.

Labor markets are another area in which the government hopes to improve efficiency by subsidizing information, training, and the hiring of unemployed or underemployed workers. The GAO studied forty-seven such programs spread across nine agencies and spending $18 billion in 2009. Only five of them had assessed their impacts and only some of them demonstrated positive effects; these tended to be small, inconclusive, or restricted to the short term.
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According to Robert La Londe, a leading expert on these policies, job search assistance programs are more likely than other employment programs to yield positive short-term impacts. The results for other programs is mixed, depending on the targeted groups. Classroom training has consistently generated modest short-term and medium-term benefits for economically disadvantaged adult women, but has just as consistently failed to produce gains for youths. For adult males, the results vary greatly across studies, partly because of methodological differences and sample sizes that are too small to measure program impacts with the same precision. On-the-job training programs have received less study. Some researchers find short-term benefits but with some doubt as to how long they persist. For reasons that are not altogether clear, private employers seldom participate in these programs, thus foregoing substantial wage subsidies available for hiring disadvantaged workers. A study of the Dayton Target Jobs tax credit during the 1980s suggested that these economically disadvantaged workers cannot overcome the labor market stigma of being classified as such.
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SUPPRESSING MARKETS

I now turn from the government’s policies to perfect and supplement markets to its efforts to suppress or subdue them. As discussed in
chapter 6
, every market that the government regulates has a potential
substitute: an illegal or “informal” (or “black”) market that will provide a consumer with the same (or similar enough) product or service, presumably in a more attractive form than the legal market does (lower price, easier access, more convenient, etc.), even after one takes into account any additional costs of transacting illegally. (Where the law bars a product or service altogether—the sale of certain organs, for example—the informal market is all there is.) Other things being equal, the higher the cost of regulatory compliance, the more likely it is that market actors will decide to avoid it by instead transacting informally for a close substitute.

Other things, of course, are not always equal. Putting committed fraudsters to one side (discussed in
chapters 6
and
10
), we can presume that market actors are as law-abiding as anyone else; they will only consider informality when compliance costs exceed some moral or economic threshold. It may also depend on how compliant they think their competitors are, how they assess the risks of detection and sanctions, and so forth. Because informal markets are usually surreptitious, they tend to be more difficult to police. (Usually, but not always; unlicensed street vendors, buskers, gypsy cabs, drug dealers, prostitutes, and the like often operate in plain sight, quickly receding when they think that the police are about.) The benefits of evasion also tempt market actors to bribe officials who could blow the whistle on them but who for a price can be induced to look the other way.

Black markets of any size tend to undermine the legitimate government programs that they seek to circumvent, with potentially severe and perverse policy consequences. An example is the U.S. domestic and treaty law restricting the importation, sale, and use of certain coolants that damage the earth’s ozone layer and contribute to global warming. Because of this restriction, the value of the illegal coolant HCFC-22 to those who need it to service existing air conditioners (which during a recession are used longer) has soared, and a large black market has sprung up to supply it at lower prices. This has increased its use, undermined the policy’s environmental goals, and driven the production and marketing of the gas to Asia, where it is less regulated.
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The size of the informal sector in the United States is understandably uncertain but no economist doubts that it is immense. A study by Edgar Feige, a leading expert on our underground economy, estimates that Americans earned $2 trillion in 2012 that they failed to report to the Internal Revenue Service, and this number is increasing for reasons that are deeply embedded in the changing nature of the economy.
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The size of the informal sector in developing countries with whom the United States must compete is also immense; for some goods and services, it dwarfs the legal market.
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According to recent work by Robert Neuwirth, roughly one half of the world’s workers work in jobs that are “neither regulated nor registered, getting paid in cash, and, most often, evading income taxes.”
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A comparative study of the size of the informal economies in 110 countries estimated that in 2000 it was 41 percent of the total economy in developing countries. Significantly, the informal sector was also very large in the most developed nations in which legal compliance is probably greatest: 18 percent in the countries of the Organisation for Economic Cooperation and Development, and 8.8 percent in the United States ($864 billion).
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The expansion of the informal sector has coincided with the expansion of government regulation. There is every reason to believe that regulation is an important driver of informal markets, and also that these markets engender yet more regulation as officials desperately seek to control them by cracking down with new rules and more intensive enforcement. At the London Olympics, for example, the British statute that prohibited any secondary market in tickets—levying heavy fines for reselling tickets—yielded banks of empty seats even for some popular events because holders of tickets who did not want to use them for these particular events could not clear the market by selling the tickets to spectators willing to pay for them. Many spectators managed to circumvent this system in the black market, of course, but at a higher cost than necessary.
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Political entrepreneurship flourishes in policy making directed at “sinful” goods. Since there is so much money to be made in illegal markets for such goods—especially when policy and enforcement drive out potential competitors—unusual coalitions of “bootleggers
and Baptists” can form in which the former earn higher profits (what economists term “rents”) while the latter preach and organize against such practices.
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Opportunistic police bureaucracies can then use these markets to justify expanded authority, personnel, and budget.

The futility and even perversity of enhanced enforcement against such markets is most evident with the so-called war on drugs, proclaimed by president Richard Nixon in 1969. It is surely the government’s most hard-fought, long-lasting, and costly program of market suppression. Although some commentators argue that criminalizing the use and trafficking of abusable drugs is misguided, such drugs do create three types of genuine social problems—physiological toxicity, behavioral toxicity, and addiction—about which social policy is properly concerned.
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Decriminalization could also have a devastating effect on disadvantaged communities.
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That said, the war—by almost every account other than that of the Department of Justice, which has a proprietary bureaucratic interest in its perpetuation—has utterly failed on its own terms.
*
After more than forty years of intensive U.S. and Mexican government crackdowns on the illegal drug trade, efforts costing $20 to $25 billion a year and tens of thousands of lost lives in Mexico and Central America, the retail price of one gram of pure cocaine is now 74 percent cheaper than it was thirty years ago, and 16 percent lower than it was in 2001, with a similar drop for heroin and methamphetamine. (Only marijuana has not experienced a significant price decline.) These street prices have declined despite a significant increase in demand owing to the rising percentage of high school seniors who admit to having taken an illegal drug in the last year. Only 31 percent of Americans believed that the government is making much progress dealing with illegal drugs,
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and this was
before the Mexican government began to ratchet down its cooperation with our programs.
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The surprise is that the percentage is not even lower.