The Becker-Posner Blog

Are Government Bureaucracies Too Big? Becker

Governments, even in small countries, are vast bureaucracies that manage thousands of activities. The federal government of the United States, for example, runs a vast and complicated healthcare system, levies taxes on individuals and corporations, pays benefits to retirees, runs a large and highly mechanized military, decides whether pipelines can be built and oil exported out of the US, manages a vast payment system for the unemployed, and enforces complex regulations of banks. I could go on endlessly. A smaller government like Argentina’s does about as many things, but on a much smaller scale.

As Posner indicates, large corporations also have extensive bureaucracies, but several differences between public and private bureaucracies work against the relative efficiency of governments. The most basic is that government bureaucracies are just too big to perform most of their activities effectively. Governments undertake too many and too complicated activities to expect effective oversight from presidents, prime ministers, and legislators. Private corporations would also be much less efficient if they grew to the size of large governments, which explains why corporate bureaucracies are far more limited in size, and especially in scope.

Further raising the efficiency of corporate bureaucracies relative to public bureaucracies is that corporations typically face much stronger competition. Corporate competition is from other firms, non-corporate as well as corporate, and from firms that form when a corporation faltered in its efficiency. Also, a badly performing corporation often faces a battle from ”corporate raiders” for control of the corporation. Although such private competition is not always effective in disciplining the corporations who are too bureaucratic to be efficient, many formerly powerful corporations have vanished after they no longer performed well. These include Lehman brothers, A&P Groceries, Wong computers, Bethlehem Steel, and Woolworth.

Government bureaucracies also face some competition, but it is much weaker and less immediate. In democracies, elections occur at regular intervals, but the complexity of governments makes it extremely difficult for voters to judge whether the incumbents are performing well. Profit statements are usually a good guide to corporate performance, but there is nothing comparable for governments. Interested voters can look at a few things to judge, for example, whether government-financed health care is effective, but  nothing for government performance is as simple and as inclusive as a balance sheet report on how profitable a corporation is. In addition, powerful special interests often spend considerable resources to insure that voters hear their point of view far more often and more effectively than opposing views.

Another difference between corporate and government bureaucracies is that corporations use the price system far more than do governments. For example, government pay scales are much more compressed than are those of corporations. A head of a major government agency, such as the SEC or the EPA, has at least as much responsibility as the heads of major corporate divisions, but government heads earn only a fraction of what corporate heads do. Of course, heads of government agencies often leave after several years to take lucrative private sector positions, but they would do that much less frequently if they were better paid in their government jobs.

Another example is from the immigration authority (USCIS) that allocates visas on a first-come-first-served- basis that often takes weeks and even months. A corporation handling this issue would have a system of fees that would be higher for those who need a quicker decision.

So my answer to the question posed in the title of my discussion of whether government bureaucracies are too big and inefficient is a strong “yes”. Government should do much less so they can concentrate on and do better with the tasks they are most needed for, such as police and military, infrastructure, safety nets, and regulation of activities with big externalities. Regrettably, I am not optimistic that much can be achieved quickly in slimming down governments, given the strong self-interests and special interests that benefit from the present situation.

Generational Mobility in the United States-Becker

The degree of mobility over time measures how the income and education of children of parents with relatively low education and income compares to the income and education of children from more successful families. President Obama along with many others, has claimed that the degree of mobility in the US declined over time. Yet the limited available evidence does not support these claims about declining mobility during past 20-30 years (see the recent study by Chetty, et al, “Is the United States Still a Land of Opportunity?” January, 2014).

Some of the claims about declining mobility appear to depend on the large increase in income inequality since 1980. Not only have the incomes of the top 1% increased much faster than other incomes, but also incomes of college graduates have grown substantially relative to the incomes of persons who did not graduate from college. Nevertheless, an increase in the spread of incomes at a moment in time does not necessarily imply a change in the degree of mobility of their children. For example, income inequality in the parents’ generation could increase, and that higher inequality could be maintained into the children’s generation, and yet the upward mobility of children from poorer families (or the downward mobility of richer children) could be increasing over time.

Although there is no necessary connection between inequality and mobility, one should expect some causation from lower mobility to greater inequality in succeeding generations. For lower mobility means that children from poorer families tend not to do as well as they formerly did, and children from richer families do better than formerly. Over time, this stretches out the income distribution and produces greater inequality. In this case, the causation runs from mobility to inequality, not from inequality to mobility.

A few economists have produced evidence that countries with greater inequality tend to have lower mobility (see Corak, Journal of Economic Perspectives, 2013). For example, Scandinavian countries tend to have both relatively low inequality and high mobility. The causation in their analysis usually runs from greater inequality to lower mobility. Nevertheless, a close examination of the empirical basis for this claim suggests that the relation between inequality and mobility across countries may actually be quite weak (see the preliminary work by the Chicago graduate student Bradley Setzler).

Just as many forces determine the degree of income inequality, so too does the degree of mobility in income and education between parents and children have many determinants. The most important ones are 1) the investment of time and money by parents with different levels of education and income in improving the human capital of their children, 2) the degree of transmission of various types of abilities from parents to children, 3) the magnitude of government spending on the human capital formation of children, and 4) whether this government spending is relatively greater or smaller for children from disadvantaged backgrounds.

The nature of these influences on the degree of mobility implies that greater mobility is not necessarily “better”, at least as judged by the degree of efficiency of the human capital investment process and the market for earnings. For example, if the parent-children transmission of abilities is high or parental education is highly productive in raising the human capital of their children, one would expect an efficient investment process to have a low degree of parent-child mobility in education or earnings. On the other hand, low mobility may be a sign of inefficiency if say able children of poorer parents are unable to obtain the education consistent with their abilities.

These reflections are relevant in trying to evaluate the degree of mobility in the US compared to other countries. The intergeneration elasticity (IGE) measures the effect of an increase or decrease in the income of parents relative to the mean income of their generation on the incomes of their children. An IGE of say 0.4- about the IGE for the US- means that a 10% increase in parental income raises their children’s income on average by 4% relative to the mean income of the children’s generation.

The IGE for the US is higher than those for Japan and many Western European countries, and is below those for many Latin American countries. Even though mobility in the US may not have fallen over time, does the relatively high IGE for the US compared to other developed countries indicate that American mobility is too low?

A major reason why the answer to this question may be in the affirmative is the high and relatively stable American dropout rate from high school of poorer African Americans and Hispanic Americans. I believe much of the blame rests with the fact that many children from minority families are raised with a single and not very educated parent, and that the quality of the schools attended by minority children is deficient. The interaction of these two forces produces a deadly mixture holding back the progress of minority children. The degree of mobility would increase significantly if ways could be found to efficiently lower the high school dropout rate.

 

Social Mobility and Income Inequality—Posner

As Becker notes, recent research indicates that social mobility (how much a person rises or falls in the income distribution relative to his or her parents) in the United States has remained constant, albeit at a low level by comparison with other wealthy countries (for a partial summary of this research, see Raj Chetty et al., “The Equality of Opportunity Project,” www.equality-of-opportunity.org/) at the same time that inequality of income in the United States has risen, and now far exceeds that in the other wealthy countries. 

A striking finding by the researchers is the high geographical variance in mobility. The probability that a person whose parents were in the bottom fifth of the income distribution will rise to the top fifth is roughly twice that for persons living in the northeast or on the west coast than for for persons living in the south and the midwest—about 10 percent versus 5 percent. This is probably related to the pattern of immigration, the quality of schools, and the fact that educated and ambitious people tend to find the northeast and far west culturally more congenial than the south, the border states, and the midwest, with their religiosity, conservatism, gun mania, Confederate nostalgia, higher crime rates, and greater poverty. 

The fact that mobility has not declined during a period in which inequality of incomes has grown may seem paradoxical, but is not. Imagine that all incomes were close to being equal. Then social mobility would be close to zero because there would be so little to gain from getting a better job or working harder. And by the same token social mobility might be very great in a society yet income inequality also be very great. For suppose that whether one had a high or a low income was almost entirely a matter of luck. Then the children of rich and of poor families would be quite likely to changes places in the income distribution, regardless of how skewed that distribution was. 

But while social mobility and income inequality can thus move together, I am surprised that social mobility does not decrease as income inequality rises. The wealthier a family is, the more likely its children are to be secure against dropping significantly below their parents’ rank in the income distribution. One reason is that wealthy people (unless they are sports or entertainment figures) are apt to have high IQs, especially now that, with the decline of discrimination, there is more assortative mating than there used to be. Another reason is that the children of wealthy people have a better shot at admission to the best schools and colleges. This is partly because the kids tend to be smart, partly because the parents provide positive role models for the children and also can invest heavily in tutoring and other aids to their children’s education, and partly because colleges and universities tend to favor the admission of rich kids, who can be expected to become generous donors. And finally the children of the rich receive excellent nutrition and medical care, hence tend to be healthier than the average child. 

One reason social mobility seems not to have been significantly affected by the rising inequality of income in the United States is that much of the growth in inequality is a result of increased incomes of the wealthiest 1 percent of the population, whose share of national income has grown from 13 percent in 1982 to 22 percent today, and whose after-tax income has increased almost threefold in that period. Even if one percent of the population can immunize itself from downward mobility, overall mobility should not be greatly affected. This is so even though if the top 1 percent have become richer, the bottom 99 percent have become poorer. But becoming poorer needn’t make a person likelier to climb out of poverty, since the poorer one is, the harder the climb. 

There are several reasons for encouraging social mobility, and this should make us resist complacency about the fact that it hasn’t changed much despite the increased inequality of incomes, and focus rather on the fact that it’s much lower than in our peer countries. One reason for trying to increase mobility is to stimulate ambition and effort. If people born into families who are low on the income distribution sense few opportunities to rise, they will have little incentive to try to better their lot. A related reason is that many highly successful people had humble beginnings; and we would like our educational and social welfare systems to discover and assist and encourage these people when young. A further reason for trying to increase mobility is to discourage people from seeking betterment of their lot through crime or gambling, activities that can be attractive to people who despair of improving their lot by lawful work rather than crime and by effort rather than luck. 

And finally, although the fact that social mobility has not fallen as income inequality has risen may seem to imply that reducing inequality would not increase mobility, that may not be correct. Social mobility may not have fallen, I have suggested, only because the rise in inequality has been so skewed in favor of a small fraction of the population. A significant redistribution of wealth to the poorer part of the population might, by improving nutrition and family stability, generate increased upward mobility.

Should Partisan Gerrymandering Be Outlawed? Posner

The term “gerrymandering” refers to a political tactic that in the United States goes back to the eighteenth century—the tactic of configuring electoral districts to favor the party that does the configuring, or to achieve some other non-neutral political goal: for example, reducing minority representation in the legislature by drawing district boundaries in such a way as to pack most of the minority voters into a handful of districts, thus minimizing the number of legislators whom they can elect. The Supreme Court held racial gerrymandering unconstitutional—a violation of the equal protection of the laws—in 1960. But the Court has refused to hold that “partisan” gerrymandering, which means configuring districts so as to favor the party that controls the legislature doing the districting, is unconstitutional. 

Article I of the Constitution provides in section 4 that “The Times, Places and Manner of holding Elections for ... [members of the federal House of] Representatives, shall be prescribed in each State by the Legislature thereof; but the Congress may at any time by Law make or alter such Regulations.” The Supreme Court has required, in the name of equal protection of the laws, that congressional districts must have approximately the same number of people in them (“one man, one vote”). But this leaves a state legislature free to draw the district boundaries in a way that favors one party over the other. Take Illinois, a state that is entitled to have 18 Representatives in Congress (plus of course two Senators, but Senators are elected statewide, so the issue of gerrymandering does not arise for them). Illinois's eighteen congressional districts have virtually identical populations, as required by the “one man, one vote” rule. The City of Chicago is strongly Democratic, but the suburbs tend to be Republican. If the Republicans controlled the Illinois legislature (they don’t), they could, without altering the population size of any district, redraw district boundaries in the Chicago area either to pack the city residents into as few districts as possible in order to minimize the number of districts that would elect a Democratic Representative, or to spread them out into as many districts as possible, where they would be in a minority and so wouldn’t elect any Representatives. Or the legislative majority could combine these tactics: compress as many city residents as possible into a few districts, and place the others in districts in which they would be outnumbered by Republican suburbanites. For a real-world example, an article called “The Great Gerrymander of 2012,” by Sam Wang, www.nytimes.com/2013/02/03/opinion/sunday/the-great-gerry‌mander-of-2012.html?pagewanted=all&_r=0 (Feb. 2, 2013), points out that “in the seven states where Republicans redrew the districts [in advance of the 2012 national elections], 16.7 million votes were cast for Republicans and 16.4 million votes were cast for Democrats. This elected 73 Republicans and 34 Democrats”—a much higher ratio of Republican to Democrat Representatives than of Republican to Democratic voters. In Ohio for example Republicans won 75 percent of the House seats with 51 percent of the votes. In Maryland and Illinois, where the legislatures were controlled by the Democrats, the figures were approximately reversed. In California, where the legislature had turned redistricting over to a nonpartisan commission, there was no significant discrepancy between the two percentages. 

It seems hard to square the results of partisan gerrymandering with “one man, one vote.” It’s true that even in the absence of such gerrymandering, a person who belongs to a minority party in a district shouldn’t, from the standpoint of efficacy, bother to vote in a House race, because his vote will have no effect on who is elected to be the Representative from that district. But the minority voter’s political impotence is attributable to majority preference, a result implied by democratic political theory, while in the 2012 election Democratic voters were in the majority in some states in which, nevertheless, more Republicans than Democrats were elected to the House, and vice versa, a result brought about by partisan gerrymandering and in tension with democratic political theory. 

Theory apart, partisan gerrymandering is objectionable because by creating safe congressional districts and thereby reducing political competition it reduces compromise in the House of Representatives. This is true with both “packing” and “spreading” the opposition voters. If the result of “packing” those voters is to create say a solidly Democratic district, the Representative will have no incentive to appeal to Republican voters in the district; there are few of them; he doesn’t need them; and for him to try to attract some of that small number might anger his core constituents. If the result of spreading Democratic voters is to create solidly Republican districts, the Representatives of those districts will similarly have little incentive to try to appeal to Democratic voters. The result is political gerrymandering is thus increased political polarization in the House of Representatives—which has been observed. 

I can’t see any social benefits from partisan gerrymandering--nor any difficulty (other political opposition--though that is difficulty enough) in eliminating it, either by requiring that districting be delegated to a nonpartisan commission in each state (the California model) or by programming a computer that will create districts of equal population that are geometrically compact—as near as possible to circular, consistently with the need to equalize the population of the districts and respect certain limitations on perfect symmetry that are imposed by geography: one doesn’t want a district line to divide a house. 

The only argument I’ve seen in favor of partisan gerrymandering is that it makes partisan voters happier—their Representative does not have to muffle his extreme views (or those of the voters of his party) in an effort to pick up some votes from members of the other party. So the voters whose candidate wins are happier but the losers—who in the 2012 election at least were more numerous—are unhappier. Gerrymandering that has such consequences is not a utility-maximizing practice.

Neighborhood Gerrymandering- Becker

Posner has a fine discussion of gerrymandering of voting districts. However, it might not be easy to get a non-partisan committee to determine boundaries because legislators will be partisan in their choice of committee members.

I will mainly discuss another form of gerrymandering; namely of districts determining attendance at different public schools. Generally, students who live in a particular district attend the public schools in that district, with exceptions for charter and magnet schools, and other special schools. Since schools differ greatly in their quality, many parents prefer living in districts with better schools. One objective measure of this preference is the difference in prices of houses of a given quality, with similar neighborhood amenities, etc. between districts with good schools and those with lower quality schools.

Families who value education and have higher incomes will bid more for houses in districts with good schools. This will bid up the prices of these houses, and thereby would reduce the advantages of living there. Nevertheless, the higher price tag in good school districts would typically not be large enough to deter families with the greatest willingness to pay for good schools from moving there.

One way to measure objectively the housing premium for good schools is to compare the prices of similar houses on both sides of the boundary separating good school districts from other districts-a technique used in various studies, including a dissertation at Chicago by Daniel Tannenbaum. He is finding significantly higher prices for housing on the boundary within the good school districts.

Given the advantage of living in districts with good schools, there is jockeying to draw district boundaries in ways that favor families with greater political clout. These tend to be wealthier and more educated families, and also persons supporting the parties in power. If the boundaries are changed to place their houses in better school districts, homeowners gain doubly: their houses rise in value, and their children attend better schools.

The advantages of living in particular congressional districts can also be determined by comparing housing prices on different sides of the boundaries between congressional districts. I doubt if people are willing to pay much to be in districts with greater numbers of Republicans or Democrats because that has little effect on their personal benefits. However, regardless of their political affiliation, they would be willing to pay through higher housing prices to be in districts that provide greater subsidies and other benefits to residents because these districts have with influential representatives. They would pay higher housing prices to be in these districts, even if they would not vote for the influential representatives.

 

Is the US in For Secular Stagnation: Déjà Vu All Over Again- Becker

The increasingly frequent arguments that the US may be for in a period of secular stagnation – that is, long term slow growth- brings to mind the ex-baseball player Yogi Berra’s (alleged) statement that he was observing “déjà vu all over again”. It is all over again because during the latter part of the Great Depression, and again immediately after Word War II, many economists were warning about the prospects of slow growth unless governments invested at a high rate. I do not believe this is the prospects for the present economy.

The arguments made at that time are eerily similar to those currently made. Alvin Hansen of Harvard University claimed in the latter part of the 1930s that because of presumed modest technological progress and weak private investment, the economy would move forward with little economic progress unless the government provided substantial stimulus. Many economists after the Second World War believed that because of high savings rates, especially among richer persons, savings would be too large compared to private investment to produce full employment without large-scale government investments. Present proponents of the secular stagnation thesis make closely related arguments, even though the economy has greatly changed over the past 70 years.

On the technological front, the claim is that despite the development of computers and the Internet, the prospects for major innovations in the next decade are not bright. I believe these arguments are wrong (see my post, “Will Long-Term Growth Slow down, 10-07-12), although the longer-term future is not knowable with any confidence.

Most of the pessimism about prospects for technological advances does not recognize the latest developments in energy and medical care. Fracking and the extraction of oil and natural gas from shale rock have greatly increased the supply and lowered the price of natural gas, and to a lesser that of oil. Also neglected is the revolution going on in personalized treatments of cancer and other major diseases. That advances in life expectancy and the quality of life are not captured in GDP measures (they could be included without too much effort) should not blind us to their robust advances in recent year that have added immense value to consumer welfare. Personalized medicine, which is about to explode, will raise that value much further.

Perhaps as a result of their presumed limited advances in technology, secular stagnation proponents believe there will be insufficient private and public investment relative to the level of savings, even at nominal interest rates that have been close to zero. They cite the weak investment in the US, and even more so in Europe, during the slow recovery from the depths of the Great Recession. The growth in GDP has also been disappointing compared to the recovery in GDP from other severe recessions, and the decline from peak unemployment has been slow.

However, It would seem strange that the US cannot generate enough investment even though the 1990s was a decade of good overall growth in GDP and rapid growth in employment. The first 7 years of this century also had low unemployment and high investment, although part of this investment was in the housing industry that led to an unsustainable bubble in housing prices. I doubt that the American economy underwent such a large structural change over this relatively short period, especially given the continuing stimulus in world demand from a rapidly growing Chinese economy and that of other developing countries.

I agree with the secular stagnation thesis that the government should increase overall investment in various kinds of infrastructure, including bridges, airports, and road. However, I strongly urge that, whenever feasible, user fees are implemented, including time-of-use fees on roads (see, for example, the case for congestion fees in my “The Solution to Traffic Congestion”, 2-12-06).

The main way governments can help the economy is by reforming tax and regulatory policies. For example, the US has one of the highest corporate income taxes in the developed world at about 35 percent. A reduction in this rate to no more than 30 percent, and preferably to 25 percent, combined with giving firms the right to expense all investments, would be a major stimulant to corporate and other investment.

The growth in regulation in the US has been rapid since the end of the Reagan administration, sufficiently so that America’s world ranking in the degree of regulation has greatly worsened over time.  The US standing will get even worse as a result of the convoluted and extensive financial regulations in the Dodd- Frank Act, and the messy and extensive regulations that seem to be developing in the healthcare industry as a result of the Affordable Care Act. One way to simplify and reduce these and other regulations is to increase the role of clear simple rules, such as higher equity requirements for banks, in place of regulator discretion. This would provide investors with clearer and simpler guidelines about what they can and cannot do.

To conclude, I do not believe the American economy will experience secular stagnation over the next decade because technology will continue to advance at a good pace, and there will be no dearth of private investment opportunities. But it would be valuable to cut corporate income taxes and reduce the massive amount of regulation. These changes would stimulate investment and growth in a way that also improves the efficiency of the American economy,

 

Secular Stagnation—Posner

I agree with Becker that the candidates that he discusses for retarding U.S. economic growth in coming years, such as a technological slowdown or reduced private investment, are implausible; also that there are useful reforms, notably tax reform, that can stimulate economic growth. But like Larry Summers, whose recent paper “The 2013 Martin Feldstein Lecture: Economic Possibilities for Our Children,” NBER Reporter, 2013, no. 4, www.nber.org/reporter, has influenced my thinking, there’s a risk, not of a technological slowdown but of a technological speed-up, that could—implausible, futuristic, and alarmist as this may seem—retard U.S. economic growth in the coming decade and beyond. 

Suppose that very cheap and very capable machines, which require very little labor to design, produce, or maintain (mainly just a few computer geeks to assist the computers to design new computers and other new machines), provide an attractive substitute for labor in some industry. An example mentioned by Summers is the driverless motor vehicle, which has been developed by Google, and works, and will be in mass production in just a few years, and which is just an ordinary vehicle plus a small though very capable computer. The driverless vehicle could displace most truck drivers, taxi drivers, bus drivers, drivers of ambulances and other emergency vehicles, chauffeurs, and drivers of military vehicles. There are some 3.5 million truck drivers in the United States and 900,000 bus and taxi drivers and chauffeurs: in total, a nontrivial fraction of the total U.S. work force. Where are all these people to go when their jobs are replaced by a computer lodged in a driverless vehicle? Many other jobs will be disappearing because of automation at the same time. Similar technology is likely to be displacing in approximately the same time frame airplane pilots, warehouse workers, workers in factories that produce vehicles, oil-field workers, and many other types of worker as well. Historically, it is true, new technologies created jobs for a lot of workers, but this seems unlikely to happen in the case of computer technology. Driverless cars are a good example. They just require the building and installing of computers that have already been designed. The manpower needs are trivial. 

Of course for the driverless vehicle to catch on, it will have to offer economies, as doubtless it will. And, with no truck drivers to pay, the cost of truck transportation will fall, and price will follow. So goods shipped by truck will cost less, and people will buy more of them, or if they buy the same quantity will use the money they save to buy more of other goods or services. But the production of many of the other goods or services that they buy will be automated, just like truck transportation, and the demand for labor by the providers of those goods or services may therefore be declining simultaneously with the decline in the demand for drivers. It is difficult to imagine productive activities that cannot be automated—mining, construction, many medical services, house cleaning: the list goes on and on. 

A decline in the demand for labor, caused by automation, will result in lower wages, without necessarily producing an increase in employment (work effort will not grow if there is no work), let alone an increase in national income. With the federal minimum wage near the poverty level (though some states have higher minimum wages, as permitted by federal law), a fall in wages to or near that level may result in a decline in the percentage of the population that is employed, and in turn to a reduction in consumption (assuming the profits from automation are largely limited to a small upper class) and investment. One likely response will be an expansion of the social safety net, which will further discourage employment, as well as requiring higher taxes, which will further limit consumption. 

These consequences of technological progress are highly speculative, but cannot be ruled out categorically. Like climate change, they are a shadow falling on the future.

Bureaucracy and Efficiency—Posner

The glitches accompanying the launch of President Obama’s Affordable Care Act have invited criticism of government bureaucracy. Bureaucracies indeed have lots of problems, maybe ineradicable, and by no means limited just to government bureaucracies. 

The term “bureaucracy” refers to administration by a multi-tiered hierarchy of trained, nonpolitical professionals guided by written rules (thus minimizing discretion). Historically it referred to governmental administration, but nowadays the term is applied to the administration, in the characteristic bureaucratic form, of any institution. 

Invariably, bureaucratized institutions are large and complex—too large and complex for face-to-face contact involving informal oral instructions to be a feasible alternative to the formal methods of communication and command that characterize bureaucracy. In very large organizations, such as the U.S. government, there are multiple bureaucracies, and likewise in large private firms and large public or private universities, hospital complexes, foundations, and so on. The driving force of bureaucratic structure is complexity of institutional mission, requiring governance by multiple specialists coordinated hierarchically by formal procedures. 

An institution has a mission. But the people who compose it—the bureaucrats—have personal concerns: income, power, job security, promotion, easy working conditions. There are tradeoffs among these elements of a job; in particular, income is traded off against job security, easy working conditions, and other, often nonpecuniary, benefits. 

The particular problem of American bureaucracy is the entanglement of government bureaucracies with legislatures in a setting of rivalrous bureaucracies. The recent fiasco of the website for the Affordable Care Act is an important example. This fiasco is an aspect of a much larger problem, which is the incompetence of federal government procurement of computer services. The efficient method of procurement would be to have an agency whose mission was to procure computer services for the government. Different agencies would submit their computer needs to the computer agency, which would evaluate the needs of the applicant agencies and the best (most economical, most suitable) means of meeting those needs. Agencies don’t want this because they don’t want to share their data with other agencies; information is power and they want to be able to exact a price for sharing their information; normally the prices takes the form of return information. Congress doesn’t want a common computer agency because it wants to be able to authorize computer procurement agency by agency, granting procurement to whichever computer provider has political clout with the particular congressional committee responsible for the agency. 

Because of the salary levels that skilled computer engineers command, it is difficult for government agencies to hire and retain the most highly qualified computer experts. The logical solution would be outsourcing to computer service providers, and that was the solution chosen for the website of the Affordable Care Act. But when the bureaucrats lack high-level technical skills, it is difficult for them to select and supervise an outside provider of high-level technical services. The bureaucracy needs to be able, at the least, to retain a computer consultant who can steer the agency to a computer provider that will meet the agency’s needs and who can supervise the provider to make sure it delivers in timely fashion. But to find and negotiate with and supervise a consultant of the requisite skill and experience itself requires a high level of technical ability again rarely found in government agencies. The combination of modest income with job security and other benefits temds not to be attractive to the highest-quality workers in elite, highly compensated fields. Bureaucracy tends to work well only when it is performing relatively simple, highly familiar tasks, far removed from the entrepreneurial risk common in highly competitive fields. 

A particular difficulty in federal bureaucracies is the extraordinary difficulty of actually firing surplus or underperforming employees. Apart from the procedural rights accorded to employees sought to be discharged, employees at risk will often seek to forge alliances with influential managers or even members of Congress, or congressional staff. As a result it’s usually too much of a bother actually to fire an underperforming or superfluous worker, and instead the agency will find him or her what is called a “parking place,” meaning a job in which the employee can do no harm, be out of the way. 

It is not obvious what the solution is, especially since bureaucracy is both a necessity of and a plague upon large private as well as public institutions, including corporations. It is well known that in successful private corporations staff tends to build up until an economic downturn or other shock forces the corporation to cut staff in order to minimize costs. Until that happens staff tends to swell. Managers, their compensation geared to the span of their control, push their superiors to authorize an increase in staff, while the managers’ subordinates seek to make themselves indispensable by hoarding information and fostering personal relationships with colleagues, or sometimes with influential suppliers or customers of the corporation. For in private as in public institutions the possession of critical information is a personal asset of great value, typically hoarded by its possessor. And so it may be very difficult for even able administrators to obtain the information they need for optimal management. The bureaucracy yields up its private hoard of information only reluctantly. in exchange for autonomy, security, and privileges. 

Despite the problems of bureaucracy that I have been sketching, it must be on balance an efficient means of administration or it wouldn’t be so pervasive in both the public and the private sectors. This is a depressing reflection, because bureaucracy is a function of complexity, its pathologies are amplified by complexity—and complexity is growing throughout our governmental and commercial institutions. 

Competition and the Efficiency of Bureaucracies- Becker

Bureaucracies are large complex hierarchical organizations governed, as Posner indicates, by formal rules rather than discretionary choices. This apparent rigidity in the decision-making process does not necessarily make bureaucracies “inefficient” because they may have advantages of scale and scope that offset their disadvantages of inflexibility and remote decision-making.

Whether an organization is “efficient” cannot be defined in any absolute sense, but only relative to feasible alternatives. Therefore, it is reasonable to conclude that a large bureaucratic organization is efficient if it manages to thrive in a competitive sector; that is, a sector with easy entry of organizations with different decision-making structures. For if potential entrants were more efficient than the bureaucratic organizations, they would enter the sector and out-compete the bureaucracies.

Banks, oil companies, and manufacturers of large building equipment, to take a few examples, are in industries without major artificial restrictions on entry of competitors. Large bureaucratic firms, such as Caterpillar, JPMorgan Chase, and Exxon, persist profitably in these industries, sometimes alongside much smaller firms, like small banks, small equipment companies, and wildcat oil drillers that are generally more nimble. The persistence of these large bureaucratic companies suggests that their net advantages, taking into account their greater rigidity, are sufficiently great to enable them to survive the competition of smaller and more flexible firms. This is an application of the “Survival Principle” approach to efficiency developed decades ago by the Nobel economist George Stigler  (see his article, “The Economies of Scale”, Journal of Law and Economics, October, 1958).

Government bureaucracies, by contrast, are often in non-competitive situations since other organizations may not be allowed to compete directly against them. The military, for example, is a huge bureaucracy that faces no competition in fighting, which means that it is hard to find a way to measure its degree of efficiency. State-owned enterprises in China often face no direct competition because of laws giving them monopoly power over their sectors. Still, one can try to judge the efficiency of these government organizations by comparing their productivity against that of foreign private firms in the same industry, or in the Chinese case, against private Chinese firms in other more competitive sectors.

Some government agencies do face direct competition from private organizations or from other government agencies. For example, the social security bureau competes to some extent against companies that invest funds from IRA accounts, the CIA competes against the FBI in collecting information, and federal agencies face some competition from state and local agencies. In addition, elections may be partly decided on claims about which candidates can help organize various government sectors more efficiently.

This competition is often very useful in improving the efficiency of the government agencies. However, it is usually weaker and less direct than the competition faced by private firms in many industries. That is why the bureaucracies of large private firms tend to be more efficient than the bureaucracies of related government agencies, although I repeat comparing efficiency across sectors is not easy.

 

 

 

Recent Mexican Reforms and the Impact on the United States-Becker

The President of Mexico, Enrique Pena Nieto, is a member of the Institutional Revolutionary Party (PRI) that traditionally has had a leftist agenda. Yet in the short period since his election, Pena Nieto has managed to gain the cooperation of the other 2 main political parties in pushing through a series of remarkable changes that may transform Mexico into a world-class nation with profound implications for the United States.

The reform that recently received great attention is the opening up of the energy sector to private capital and private companies. With great fanfare, the PRI in 1938 nationalized Mexico’s oil fields. Since then, the national oil company, Pemex, has had a monopoly of the oil sector, and not surprisingly, the company has been behind world standards in efficiency and innovation. As a result, Mexico’s oil production has been badly lagging in recent years, and Pemex has not developed new sources of oil, including shale. The introduction of foreign capital and enterprise should shake up a seriously underperforming sector that could greatly raises Mexico’s production of oil and natural gas.

A second major reform is the attack on the teachers union that has had a stranglehold on K-12 education in Mexico. The result of their control is a weak system of public education that has especially shortchanged the bottom half of the population who cannot afford private education. This caused sizable inequality in access to education, and has contributed to the large spread in the distribution of Mexico’s income. It takes years before reforms in a country’s education system bear fruit, but these first steps to rein in the teacher’s union monopoly is necessary to allow the next generation of young Mexicans to have much better education and earnings prospects.

Another reform is to allow much more competition into the largely monopolized telecommunications industry. This should greatly reduce the price of cell phones and charges for phone calls, and allow the poorer families of Mexico to have much easier communication with others and with the outside world.

Other reforms in Mexico are still necessary and are pending, including greater competition in the financial sector, and continuing the efforts to give employers greater ability to layoff workers. Still, what has been already accomplished, and the new attitude toward reform, gives hope that Mexico will move toward a faster rate of growth in aggregate income, and improvements in the earnings of Mexicans at the lower end of the income distribution.

Advances in the Mexican economy will not only be of the utmost importance to Mexicans, but also to the United States. They will reduce illegal and legal immigration from Mexico to the United States. Much evidence from other countries, such as South Korea, shows that immigration from a country declines greatly when its economy is growing faster, and when there is increased optimism about the economic future. Young persons tend not to leave, even to countries with much higher incomes, if there are good job opportunities, and if they expect to improve their economic situation as they get older.

Net immigration from Mexico to the US ceased during the past five years as a result of the Great Recession (see my post “The decline of Illegal Immigration From Mexico"). If Mexico begins to boom, this situation might persist even after the US fully recovers from the recession. The end of immigration from Mexico would not be good for the American economy, but it would certainly tame one of the most divisive issues among the American public: how to handle illegal immigrants, and the inflow of additional illegal immigrants. Attitudes toward illegal immigrants in this country will change if there is a general expectation of a modest number of future illegal immigrants.

The market for American capital and enterprise in Mexico’s energy sector, telecommunications, and in other industries will improve as Mexico becomes more welcoming to foreign capital and businesses. The US is by far the major trading partner of Mexico, and reforms in that nation will improve opportunities for both countries to import and export a greater collection of goods and services.

Both Canada and Mexico are adjacent to the US, but while Canada’s and America’s per capita incomes are similar, Mexico’s per capita income is only about 30% of the American level. I believe this major difference in productivity is mainly due to Mexico’s tradition of favoring public and private monopolies over private competition, Mexico’s failure to improve the education of most of its population, and the price and other restrictions imposed in labor, financial, and other markets.

For the first time in a hundred years there is real hope that Mexico is getting its act together. Mexico might even eventually join its North American neighbors in doing justice to its people and natural resources, and attaining top-level economic status. This will have a major impact on the US, especially through reduced immigration from Mexico, and from having a much stronger neighbor.