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    Why Government Appears Inefficient
    By Fred Phillips | October 19th 2012 02:56 AM | 20 comments | Print | E-mail | Track Comments
    About Fred

    After a dozen years as a market research executive, Fred Phillips was professor, dean, and vice provost at a variety of universities in the US, Europe...

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    Three reasons why government can look less efficient than it really is:

    1. Cherry-picking in privatization. Let’s suppose we could rank government agencies or services in descending order of productivity: 1, 2, 3, and so on, with agency 1 being the most efficient and productive. As a reality check, let’s note that such a ranking is indeed possible, in a rough way.

    For the sake of a simple example, though, imagine a government with only seven services. Taking “efficiency” to mean providing a needed service[1] using the least amount of dollars, and indexing the most efficient of the seven to an arbitrary 100% efficiency, a list might look like this:

    Service #1       100%   efficient.

    Service #2       92%    efficient.

    Service #3       87%    efficient.

    Service #4       75%    efficient.

    Service #5       63%    efficient.

    Service #6       59%    efficient.

    Service #7       44%    efficient.

    The average efficiency of this set of services is 74%.

    Suppose further that a critic of government says, “Government is inefficient! Its functions should be privatized! The private sector can operate it more productively!” He succeeds in getting several put up for bid. Which government services will our critic try to acquire? The most productive one that’s up for grabs, naturally. He cherry-picks Service #1, taking it out of the government sector and into private management.

    As astute policy wonks, we notice the average efficiency of the remaining six government services is 70%. Privatization has lowered the overall efficiency of government. This is not lost on Mr. Critic, either, and he bends it to his purposes, conveniently glossing over the fact that he caused it. “See?” he crows, “Government inefficiency is getting worse by the year! Something needs to be done, and that something is more privatization!”

    You can see how the story will play out. Whittling away, downward spiral, choose your metaphor. It’s a dirty game.

    This is a good moment to remind you that I’m not here today to trash privatization per se, but rather to talk about the image of government. If we could privatize with a greater dose of good intent[2] and a lot less hypocrisy, I’d have no problem with privatization.

    2. The Baumol Paradox. Economist William Baumol identified a financial reality that has come to be known as “Baumol’s Cost Disease.” It has drawn much press attention lately, though university administrators have known for years that the Baumol cost disease is “the central problem in educational finance” (Kleiman 2011). Heilbrun (2003) explains:

    ...increases in productivity are most readily achieved in industries that use of a lot of machinery and equipment. In such industries output per worker can be increased either by using more machinery or by investing in new... technology. As a result, in the typical manufacturing industry the amount of labour time needed to produce a physical unit of output declines dramatically decade after decade. [Public and service agencies are] at the other end of the spectrum.Machinery, equipment and technology play only a small role in their production process and, in any case, change very little over time.

    IT and e-government have developed rapidly in recent times, but they are not central to the production and enforcement of laws; they are only facilitators, and so they differ fundamentally from the capital equipment used in manufacturing.

    Baumol colorfully remarked, “It takes four musicians as much playing time to perform a Beethoven string quartet today as it did in 1800.” Firing one of the four musicians, or amplifying the music electronically so as to play to a larger hall, or forcing the musicians to play faster, would increase nominal productivity but would seriously degrade the quality of the listener’s experience.

    Heilbrun continues with the performing arts analogy:

    Costs in the live performing arts will rise relative to costs in the economy as a whole because wage increases in the arts have to keep up with those in the general economy even though productivity improvements in the arts lag behind.... As a result, cost per unit of output in the live performing arts is fated to rise continuously relative to costs in the economy as a whole.

    It is not just theory. Baumol and his colleagues verified it on historical data sets for various service-intensive industries in several countries. He found, for instance, that the average cast size of Broadway shows has decreased more or less steadily since 1947. This is the producers’ attempt to limit the rise of labor cost per ticket sold. However, there is a limit: One cannot perform Hamlet with half the cast members of Shakespeare’s original.

    Indeed, cost per unit of output in all service enterprises, including government, are “fated to rise continuously relative to costs in the economy as a whole.” This is the heart of the Baumol cost disease.

    Though you might imagine benefits from making government do what they do faster, louder, and with fewer people, you can also imagine the limits to this “solution.” As manufacturing occurs mostly in the private sector and government mostly consists of services, government productivity will lag behind that of the general economy no matter which party is in power.

    3. Hyper-accountability. Open-records acts, open-meeting laws, public fora, etc., are a result of taxpayers’ correct wish for transparency in government. It’s hard to say demands for transparency could in any way be called “extreme.” The more transparency the better, save that we understand the CIA must do some secret stuff.

    The consequences, though, can seem extreme.  An example: One public agency takes no less than six days to clear and issue a single piece of correspondence – a simple letter! – because experts in several regulatory areas must put in their 2¢ to ensure the letter meets all rules for open and fair treatment of constituents.

    Painted in that light, such hyper-accountability looks ridiculous. Industry is not the only sector that can be called over-regulated! And citizens need as much transparency from industry as we do from government. The difference is the many lobbyists (and legislators) paid big bucks to decry industry regulation. No one has a motive to crusade for fewer restrictions on government.

     2x2

    As a result, industry gets apparent efficiencies. I stress “apparent” because many are gained only at the expense of needed transparency. Government then appears to suffer in efficiency comparisons.

    I am not denying that there are real inefficiencies in government, some quite egregious. My point is that, as in so many other areas, appearances deceive. Things are not always as they seem, and in this case many apparent government inefficiencies are not matters of reality or of fault.



    [1] that people would use and pay for if government did not provide it.

    [2] i.e., not as a cover for putting commissions into the pockets of brokers, as would happen under social security privatization, or for raising prices at will and doing away with consumer protections, all of which leave taxpayers effectively paying more and getting less than they did before privatization.

    Comments

    UvaE
    Fred, all three are valid arguments, and they are important to keep in mind because it's easy to get caught up in government-trashing and over-privatization.
    But we have to confront not only the egrarious inefficiencies in government but the more subtle forms of white collar crime that exist within public institutions.
    I take 4 tests on the same day 3 times a semester. For each round, I study the hardest for the first, and thus have less time to study for the 2nd, 3rd, and 4th. As a result my grades for the tests are as follows:
    Test 1: 100%
    Test 2: 92%
    Test 3: 87%
    Test 4: 75%
    After two tests, I have a solid grade in the first class, a good A in the second class, and lesser grades in the 3rd and fourth. On the third round of testing then, I opt out of taking Test 1, since I am happy with my grade, in order to concentrate more on the other classes.
    If a piece of gov't were privatized, shouldn't we expect the efficiencies of other gov't offices to rise as more resources become available, instead of remaining the same?

    Thor Russell
    Hardly, you wouldn't want the same amount of money/resources being now spent on less things! Its hardly acceptable to spend $1B on three offices when it was previously spent on four just because the money is still there.
    Thor Russell
    Hank
    Good article. Because government is expected to be inefficient, we are more often surprised when it isn't.  When I applied for the registered trademark status on Science 2.0 and our other trademarks, I did it myself rather than using an attorney, to see how the system worked.  While things plodded along going nowhere, with meaningless, confusing emails, when I called the USPTO attorney on the phone I was stunned at her conscientious and rapid response and the clear answers I got.  Ditto for the California DMV and voting, despite the fact that California is legendarily ineffective.  I have a $40,000 tax bill from California, for example, because they want to declare every blogger on this site an employee and extrapolated the taxes I would owe if everyone were an employee.  That's not very efficient, since most of our contributors don't even live in California and therefore can never owe taxes, but it's been a year of them going back and forth, wandering around and still carrying $40K on their books they know they don't have coming.   

    Would roads not work if those people were suddenly missing from the government union? Not in the least!  :)
    Gerhard Adam
    Do you really think that's any different than the company that sends you to voice-mail hell simply because you want to talk to a manager?  Is it coincidence that over the past few decades it has become nearly impossible to file a complaint about a company's services or products [without simply be redirected to some 'dead letter' website].

    We are so used to these aggravations, that we simply tolerate them, but when it comes to government we feel like we want our money's [tax dollars] worth.  Yet, every candidate for political office, brings ever more baggage regarding the things they're going to do, which no one ever appears to question regarding efficiency or inefficiency.

    More importantly, we aren't even aware of how much inefficiency exists simply because of private sector jobs that may be dependent on these government interactions.  It's easy to take a shot a government, because no matter what they do, there is something they can be blamed for. 

    An example that just came up in a discussion was to eliminate waste associated with the "war on drugs" and jail terms associated with that.  It should be clear that if the drugs were legalized, that would free up enormous resources, as well as provide revenue to the government.  However, people don't want to be responsible for their own actions, so the government must have these inefficient agencies and engage in practices to control these drugs because people can't control themselves.  Secondly, if we were to reduce the number of individuals incarcerated because of drugs, then we could reduce the costs of our prison population.  However, then we would hear the criticism of the number of private businesses impacted that were responsible for providing food, and services, etc. etc. etc.

    In short, no matter what government does, someone is going to complain while we maintain the illusion that private corporations have the "secret".

    Private corporations have two things they can do that government can't.  They can easily eliminate services/people simply because they want to, and they can simply go out of business.

    Government has to do all the things that no one wants to do, and especially those things that aren't profitable to do.

    This doesn't mean that there can't be improvements, but the simplistic notion that government can be run like a business is simply a fantasy.
    Mundus vult decipi
    Hank
    I have a choice to buy a product from a company that puts me in voice mail hell.  I have no choice with government.
    Gerhard Adam
    Yes, I hear that alot, but that's fundamentally not true.  There simply isn't that kind of difference in most companies.  Try it with the airlines and see where it gets you.  The only hope there is if you have some degree of "status" with them.  In most other cases, you may have a choice in distributors, but not a lot of variation from manufacturers.

    There are some places where you may have more choice than others, but increasingly even supposed competitors have all adopted the same strategies, so the apparent choice isn't particularly meaningful.
    I have no choice with government.
    You have exactly the same choices for a product you've already purchased; none.  The only choice one has is whatever decision you make before you purchase [assuming you have some relevant knowledge].  On the other hand, I have also dealt with efficient, professional people in the government.  Government doesn't hold exclusive rights to incompetence and bureaucracy.
    Mundus vult decipi
    Thor Russell
    The difference between the two is often overrated because of ideology also. Large organisations have a lot in common whether they are private or not. And when large corporations have large govt influence the distinction blurs further. Arguably that is the worst possible situation as a corporation in the pocket of govt has the rules changed to suit themselves, cannot be voted out and you cannot choose to go somewhere else. This happened in NZ with our telecoms company Telecom. It used to be govt, was mostly privatised but owned all the networks etc. It stayed horrible to deal with, but got the rules changed to hold things back so got ever further behind the world in cell/internet etc. It wouldn't invest in infrastructure either because it didn't have to.
    Thor Russell
    Airlines are an inherently bad example because the large airlines are effectively a government-enforced cartel system... the barriers to entry (already high in the airplane-flying business) are artificially sent through the roof by government regulations and interference.

    As to the argument about a product you've already purchased... well of course you don't have a choice with a product you've already purchased, and government is exactly that.
    You pay for government (like it or not... and if you don't like it, men with guns will come get the money you owe), and don't get a chance to decide what it does with your money before you pay.

    If I go purchase internet from a company that rhymes with Tomcast and they give me crappy service, I can go to any number of other companies to get my internet service. Not so with government.

    I agree that government doesn't hold exclusive rights to incompetence and bureaucracy, but they sure are darn good at promoting them both.

    Gerhard Adam
    If I go purchase internet from a company that rhymes with Tomcast and they give me crappy service, I can go to any number of other companies to get my internet service. Not so with government.
    Oh really?  We have ONE.  If you don't like it, then you can't use the internet.  How many competitors do you have for power?  How many competitors do you have for your gasoline?   How much competition is for actual phone service?  Etc. etc. etc.  If you think this is anything except artificial competition and that there's a substantive difference between any of their products then I don't know what country you're living in.
    You pay for government (like it or not... and if you don't like it, men with guns will come get the money you owe), and don't get a chance to decide what it does with your money before you pay.
    That's about the silliest thing I've heard yet.  You definitely get to decide with your votes.  It isn't the fault of the government or anyone else, if the electorate keeps voting in the same representatives, senators, and presidents.  

    In effect, your argument is that democratic elections don't work, so you'd rather have multiple dictatorships to choose from.  Also, your point about "men with guns" is overblown rhetoric.  That certainly is NOT true, and you're afford much more due process than you are from a credit card company you may owe money to.

    Even the IRS allows you to negotiate a settlement on back-taxes.  Try that with a mortgage company and see how far you get.
    I agree that government doesn't hold exclusive rights to incompetence and bureaucracy, but they sure are darn good at promoting them both.
    Then I assume you're front and center trying to help disband the military and privatize it, all the weapons systems [ especially nuclear weapons].  If not, then I have to wonder what kind of a fool places such power in the hands of those considered to be incompetent.  You obviously think that some CEO would be better suited to make such decisions in deploying troops and managing wars, so by all means ... let's see who you trust more.

    So, you can affect how government behaves, but you can't affect how companies behave.  So, if you don't like the government ... look at your neighbors and yourself, because those are the individuals responsible for it.
    Mundus vult decipi
    Thor Russell
    You sure can get some strange things said about govt efficiency. When the health reform in the USA was being debated, it was suggested that in some sense the US govt could compete with private insurers.I don't remember the details, but there was a quote from industry or an advocate that said that was completely unfair because "how could we compete with the government". This got passed around because it was so ridiculously ironic. If the govt was so inefficient then there should be nothing easier to do than compete with them. The "squeal" test often tells you FAR more than an apparently well reasoned argument.
    Thor Russell
    MikeCrow
    The Government doesn't have to charge $500/month for healthcare that costs $500/month, they can change $490, $400, $350. A company would go out of business if they had to continue to do that.

    Then, if anyone can buy $500 worth of healthcare from the government for $350, why would anyone buy a $500 insurance policy from a commercial company.
    Never is a long time.
    Thor Russell
    Well they wouldn't, except it appears that many developed world govts can actually provide $500 worth of US commercial healthcare at an actual cost to them and the taxpayer of <$350. If you compare govt healthcare in developed countries to commercial in the US, you will find they can provide a similar service for about half the cost. This shows up in numerous international surveys. In NZ that is definitely the case, our govt healthcare is about 2* more efficient than your commercial one. The reasons are, economies of scale, no need to spend money on advertising, bulk negotiating power (the USA really hates our Pharmac because we get good prices for medicine), no need to make a profit, and last but not least, no crippling litigation system. (The last one isn't a feature of govt vs industry, but we sure aren't in a hurry to copy it either!!)
    A practical example of how this litigation really hurts: My wife worked on a system for managing glucose/insulin in critically ill patients using advanced modelling. One application is premature babies, it can increase survival rates and improve health. We are using it in New Zealand and trialling it in Europe, however it was looked at and rejected for the USA because even if you saved 10 babies, if there was even the suggestion that it hurt 1, then you could get sued for millions. So the result is that hospitals in the USA cannot use this potentially life saving protocol. There are also other techniques used in newborns around the world that are not used in the USA for this reason.
    Thor Russell
    Gerhard Adam
    Yes, God forbid it might actually cause companies to become more efficient and create real competition.

    After all, you won't see me shed a tear over that kind of economic calculation.  That's precisely what numerous companies have done to the American worker.  Claiming that they can't compete unless they can use labor that costs about $2 per day, and then they want the American workers to compete against those costs and standards of living.

    Hey ... that's the way the game is played.  If the government can do it for a tiny fraction of insurance company costs on the tax revenue they collect, then insurance companies should go out of business.  There's no obligation to keep them in business if they can't do it.

    However, you also know that such a model wouldn't work, nor could it be sustained if the costs truly weren't that low, so I don't see what the point of worrying about it is [unless, of course, the government really can deliver it].
    Mundus vult decipi
    Gerhard Adam
    ...are artificially sent through the roof by government regulations and interference.
    What government regulations?  Please cite them.

    I'm becoming increasingly tired of the excuses used for businesses that are incompetent by blaming it on government.  There are no government regulations that result in the airlines providing poor customer service.  There are no government regulations to treat customers like cattle.  There are no government regulations that result in the ineptitude displayed in managing flight delays.

    So ... what are these onerous regulations that prevent a company from actually running itself efficiently?
    Mundus vult decipi
    Fred Phillips
    Some of you youngsters may not recall that US passenger air transport was de-regulated in 1978. For a good summary of the effects, pro and con, read:
    http://www.nytimes.com/2008/04/17/business/17air.html?pagewanted=all&_r=0
    Fred Phillips
    And if you think the US tax code is complex... The New Republic just published this article on "How corporations overwhelm consumers with complex fee structures." Behavioral economist Oren Bar-Gill estimates a total annual loss from this practice, to American consumers, of $13.35 billion.
    With respect to credit cards, the level of fee complexity is truly extraordinary, and it is easy for consumers to fail to notice some of what matters. You can find “annual fees, cash-advance fees, balance-transfer fees, foreign currency-conversion fees, expedited-payment fees, no-activity fees, late fees, over-limit fees, and returned-check fees”.... If sellers offer people the objectively best cell phone contracts, they will end up losing out to their competitors, who are offering contracts that are less good but subjectively more appealing.
    Bar-Gill cites the psychological science showing people put greater weight on near-term consequences, and are averse to complexity - i.e., don't read or comprehend the small print. Corporations exploit this.

    The tax code is complex and unfair, but (i) it is not deliberately targeted against your
    psychological weaknesses, and (ii) you can ask your CPA to understand it for you. Actually one of Bar-Gill's recommendations is that companies be forced to disclose full-cost information to 'trusted intermediaries' (like CPAs, for example) so they can decode and simplify for consumers.
    First, government is self perpetuating for it's own goals and any organization created to serve a purpose eventually evolves to serve mostly itself. Call it Schenck's law.

    Isn't the below inherently obvious and misleading since it does not necessarily mean that costs will go down? The recent demise of a certain solar cell co. comes to mind.

    ...increases in productivity are most readily achieved in industries that use of a lot of machinery and equipment. In such industries output per worker can be increased either by using more machinery or by investing in new... technology.

    Gerhard Adam
    I've never heard so many people willing to go to war to spread democracy and yet when they actually live in one [and have the right to vote] all they do is whine about how the government is corrupt and self-serving.

    YOU are the government.  There can be many things wrong within government, its agencies, and its behaviors, but to behave as if government is something that is "out there" is simply the empty platitudes of a lazy electorate.

    This is no different that the people that voted for term limits on senators.  How bloody stupid does an electorate have to be, to require passing a law to force itself to not vote for someone.
    Mundus vult decipi
    Fred Phillips
    Today Slate's Matthew Yglesias, with oblique reference to Baumol's cost disease, weighs in on one meme from the Obama-Romney debate :
    ... perhaps a better way of looking at this issue is through the lens of productivity.... In the military sector you see some interesting dynamics. Thanks to technology, we're way better at a task like "make this guy's house explode" than we used to be. First airplanes and then precision munitions and now unnmanned aerial vehicles have made this vastly cheaper and easier than it was in 1912.
    But for other kinds of tasks, technology progress hasn't helped much. In particular "boots on the ground" occupation-and-administration of foreign territory ... is difficult and manpower intensive. If we want to maintain a roughly constant level of boots on the ground operations then spending as a share of the economy has to steadily rise, while if we're content to explode things from afar it can steadily fall.
    Which is perhaps a roundabout way of saying that on both the military and civilian sides of the government... there's too much talk in D.C. about "budget math" and not enough talk about what specifically we're trying to accomplish and why.