Recent news is rife with reports of the government paying more than it should for all sorts of things. Simply put, incentives in government are such that decision makers often don’t act in the best interests of citizens. Resources are badly used, and society is less well off than it might be. Such problems, however, are difficult to eliminate.
Consider the following items: Minnesota bought an airplane for the Department of Transportation that cost much more than what some see as an acceptable alternative. U.S. Supreme Court nominee Harriet Miers reportedly received substantially above market value for a small tract of land needed for a road project. A U.S. agency in Iraq paid $1 million for seven used limousines for use by senior Iraqis; the limousines later turned out to be defective. Knight Ridder published a long story detailing how a Pentagon procurement initiative designed to lower costs has resulted in the Defense Department paying substantially more for many items.
The point here is not that all these allegations are true. There are other sides to most stories. Nor do these incidents necessarily involve corruption or malfeasance. Finally, government employees are not inherently incompetent or purposefully wasteful.
Rather, the point is how hard it is within government to structure incentives so that public employees make decisions that best meet the needs of society and use resources most efficiently.
Situations where there is a disconnect between the objectives of some hired manager and those of a business owner are what economists call “principal-agent” problems. Stockholders are principals of a corporation. Hired managers are the stockholders’ agents.
Refco, Enron, Tyco and Global Crossing all are examples of managers making decisions to feather their own nests to the long-run detriment of stockholders. Principal-agent issues go far beyond these extremes, however. At more mundane levels, principal-agent problems are endemic. We all know of an ambitious manager who sabotages the work of others to further his own career or one who is in a “don’t rock the boat, I’m retiring in three years” mode.
In government, public officials are the agents of citizens. Most public employees are honest and hardworking. However, because the supervisory gap between citizen and civil servant is even greater than between shareholder and manager, the few who are not honest or hardworking can create special problems. Abuse of public positions for private gain goes as far back as recorded history.
In response, governments struggle to create regulations to curb abuses. The result is voluminous civil service codes or public purchasing rules that ensnarl the efforts of all.
Such rules add layers of complexity to decisions that could be made more efficiently if large government organizations offered incentives more like those of small private entities. The existence of complex rules makes it possible for those disappointed by some decision to challenge the process. This engenders yet another layer of complexity.
Take the DOT airplane purchase. Rules for purchasing a machine that costs over a half-million dollars are complex. Airplanes are not commodities like road salt or diesel fuel. A certain Beechcraft model is not a perfect substitute for a similar Cirrus model and vice versa. There may be legitimate reasons why one manufacturer’s plane can do a given task better than that of another.
The state opted for the more expensive plane, arguing that it was better suited for the DOT’s needs. It acknowledged that rules could have allowed it to specify a given model from the outset and that it had failed to provide certain information in a timely manner to the losing bidder. I’m inclined to take the state at its word, but some will still see an abuse of public trust.
Allowing discretion reduces red tape, but increases potential for both abuse and the perception of abuse. I have not seen evidence that Harriet Miers illegally sought special treatment in the case of her condemned land nor of any quid pro quo.
But two people who had reason to be unusually sympathetic to her position were somehow appointed to a three-person panel to set a value on her land. That assigned value is generally described as being well above market levels. Others whose land is forcibly purchased wonder what went on.
Texas could rewrite laws regarding eminent domain to require greater disclosure of any potential conflicts of interest in resolving valuation disputes. This might avert future abuses but would further increase the administrative costs for all involved.
The trade-off between achieving low administrative costs and efficient resource use on one hand, and avoiding abuse of public trust on the other is inherently messy. The trade-off is less harsh in places like Minnesota or the Netherlands, with a culture of probity, than in Louisiana or Paraguay, where attitudes are different. But there are no easy solutions.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.