Sunday, October 12, 2014

Bureaucracies are not Businesses (and cannot be run as if they were)

(Written for a class assignment. Both Senator Snuff of South Dakota and his quote are fictitious. I'm posting it here anyway because the argument itself gets brought up all the time).

Earlier this week, Senator Snuff of South Dakota lamented the alleged ineptitude of government bureaucrats. Wishing “we ran American government like a business,” he opined that “[i]f we just got some of the clever fellas who run American business at the top of our government agencies, they’d get them sorted out in no time.”

Such comments play well to a conservative base that glorifies business almost as much as it vilifies government, but they grossly mischaracterize the real impediments to bureaucratic efficiency. The truth is that government agencies face unique challenges and constraints which distinguish them from businesses, and prevent them from being run in a similar fashion.

First, market competition provides business leaders with more direct and accurate signals than those government agencies receive, which better equips and better motivates businessmen to streamline their operations in innovative ways.

In a competitive marketplace, efficient organizational structures maximize profits while inefficient ones hamper them. Over time, these trends indicate to business leaders which strategies are working and which are not, allowing them to refine their own business structures accordingly. Since businessmen have a great personal incentive to increase profits, this information motivates them to anticipate problems, enact necessary changes, and overcome organizational obstacles to innovation.

Most bureaucrats face different information and different incentives. While businesses take signals from the purchasing decisions of hundreds of millions of diverse people, bureaucrats take them from a relatively small group of political decision makers – often elected in gerrymandered districts, with low turnout and few alternatives, and operating in a gridlocked and unwieldy political morass dominated by special interests. Even in the least competitive of private markets, the amount of choice which the average person has in deciding which businesses they frequent far exceeds the amount of choice they get in determining which government agencies receive their tax dollars. This makes market competition a more accurate signaling device than any public equivalent.

Agency heads also accrue minimal benefits from eliminating inefficiency, and run less risk from permitting it. If a public organization finds a way to do its job more efficiently, they do not get to keep the resulting surplus; since they operate on the public dime, they are legally required to kick leftover funds back to the general treasury. And since Congress governs bureaucratic conduct with a labyrinth of rules and legal boundaries, bureaucrats are far more likely to lose their job by challenging their constraints than they are for failing to adapt or innovate. In concert, these pressures cause public officials to prioritize rigid adherence to existing rules and norms at the expense of creative reform. Replacing current agency heads with business leaders would do nothing to alter that incentive system.

Secondly, business leaders have much more flexibility and autonomy in the management of their organizations than do public bureaucrats.

Business leaders can increase the capital at their disposal by selling shares, borrowing, retaining old earnings, fundraising, or reallocating from other departments. Government bureaucracies cannot do any of these things, because their allocation of resources is stipulated by federal appropriations bills.

Business leaders can fire people at will, even eliminating whole divisions if they deem it necessary. Alternatively, they can relocate workers from one division to another. By contrast, political patronage and strong public sector unions make this very difficult for bureaucrats, as contracts are much more set in stone.

Business leaders can raise or lower their employees pay, but many bureaucracies (like the military, for example) have fixed statutory pay grades which make this impossible.

Beyond mere managerial convenience, such differential powers send ripple effects throughout the entire organization. While private employees are kept accountable and motivated by the knowledge that they might be canned or given a raise depending on their performance, public sector workers are tempted to shirk their duties by the knowledge that agency heads are essentially powerless to stop them.

Finally, bureaucracies are tasked to accomplish different sorts of jobs than businesses. Whereas businesses have one clear objective – making money – government agencies often have multiple, ill-defined, evolving and unprofitable objectives by legislative design.

Firstly, the missions of government agencies are often left ambiguous. Due to shifting political climates, it is not always in the interests of politicians to be specific in their instructions. And due to regular election cycles, these instructions often change depending on which governing ideology is presently in office. This makes it difficult for agency leaders to give their subordinates clear direction.

Secondly, partisan gridlock at times gives bureaucracies contradictory instructions. For example, congressmen concerned about civil liberties may try to obstruct the efficient operation of the NSA; those desiring to raise public alarm over budget cuts may order bureaucrats to cut the most visible spending programs first. Alternatively, gridlock may cause legislative instructions to be watered down or full of pork-barrel spending, which impedes efficiency no matter who is in charge. In either case, bureaucratic inefficiency is not a function of incompetence, but of a confusing system of pressures which bureaucrats must constantly juggle and appease.

Finally, the sorts of jobs government agencies are likely to have are inherently less likely to be profitable, which is often the precise reason they were assigned to the public sector in the first place. For example, in the running of prisons, a clever businessmen in search of profit might seek to cut costs by crowding prisoners into smaller cells, or not feeding them as much, or not cleaning the cells as often. That lawmakers choose to give a certain service to the public sector instead indicates there are other values besides pure cost efficiency which they want the prison operators to take into account. The cutthroat cost-consciousness of the business world does a poor job of balancing those priorities.

Businessmen operate more efficiently than bureaucrats not because they are “clever fellas,” but because managing a private firm is fundamentally different from running a bureaucracy. Attempts to improve the efficiency of government organizations are laudable, but they can only proceed if we first abandon this false analogy.

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