The Fundamental Problem with All Government Agencies

Regulators are always less competent than those being regulated.

Two centuries of American governance has revealed one small idea on which both liberals and conservatives can agree: all government employees, regardless of their individual political views, seek to have their agencies' budgets increased.  Regardless of what any individual bureaucrat believes the agency is or should be doing, every last one agrees that it needs more money.

People who work for private businesses have the same attitude, particularly when it comes to wanting their own pay to go up, but there's a problem.  In order for a private business to spend more money, it has to find more customers who are willing to hand over their cold, hard cash in return for whatever the business offers.  A business can spend more money than it takes in for only a very short time, at the sufferance of a bank or group of lenders.  If a business can't quickly find enough customers to cover its costs, it goes under and its ex-employees find themselves out on the street.

Government agencies, in contrast, have no such difficulties.  Instead of persuading customers to give them money one at a time, all they have to do is persuade their legislators to vote them money.  In turn, legislators pass another bill confiscating the money from taxpayers.  It isn't their money, so politicians are always far more inclined to hand it out without worrying about getting good results than if it were.

Perverse Incentives

It always looks better if the agency can give the legislators an argument why their budget should be increased.  Thus, agency incentives are set up to make it easier to argue for more money in the next budget.

When an agency such as the department which was responsible for regulating offshore oil drilling manages to persuade Congress to give them money directly by taxing the activity they regulate, they're disconnected even from this need to justify their existence and end up doing whatever they like.  The Minerals Management Service (MMS) collected funds based on the various inspection fees required of operating drilling rigs and wells; shutting down a rig would mean losing this flow of revenue.  With incentives like these, how strict could we reasonably expect them to be?

In "Why the SEC Missed Madoff," the Wall Street Journal illustrated the results of the annual budget dance as put on by the Securities and Exchange Commission.

Its enforcers are rewarded for the number of cases brought and for following political fashion.

Bringing a lot of cases sounds like a reasonable way to measure investigators and it plays well with the legislature at budget time, but are they real cases?  What good does it do to bring cases which end up dismissed?

What about the costs imposed on businesses by bogus charges?  Even if they're dropped later, a charge by the SEC eats up a great deal of management attention and destroys economic value.

Justice Department attorneys are measured by how many years of jail time they're able to inflict, but this gives them incentives to destroy innocent people to further their careers as Elliot Spitzer did in New York.  Mike Nifong succumbed to similar mis-incentives in the notorious Duke lacrosse team rape trial; both he and Spitzer eventually paid a just price for their abusiveness, but this sort of retribution for governmental wrongdoing is sadly rare.

The Journal explained the problem with measuring SEC investigators by the number of cases brought:

The IG's March 2010 report on the Alan Stanford matter highlights other endemic problems that bring us closer to what's gone wrong.  As early as 1992, the staff of the SEC's Fort Worth, Texas, office strongly suspected Mr. Stanford of running a Ponzi scheme. Yet Ponzi and pyramid schemes, according to the report ... held low priority with SEC top management, who saw them as having little press appeal and afflicting only small investors looking to make a quick buck. Due to the uncooperative stance of the company and the offshore location of important documents, the regional office also feared that pursuing that matter would eat too many staff hours and so reduce the number of its filed cases ("stats," in agency lingo).

The SEC ignored a major Ponzi scheme for nearly twenty years because a) they wouldn't get enough press and b) investigating just one case would take too much time away from filing the required number of cases.  When the Stanford Ponzi scheme blew up, the agency got some bad press, but nobody was fired.

This illustrates once again the fundamental problem with government regulation of commercial activity.  Mr. Madoff was clearly a great deal smarter than any of the SEC attorneys who investigated him for decades.  Mr. Stanford appears to have been equally intelligent and to have set up his company so as to make it unlikely that the SEC investigators would want to pursue him.

Anybody who can make money on Wall Street will earn a lot more money than someone who merely regulates Wall Street; almost by definition, the regulators will never be as intelligent, experienced, imaginative, or capable as the people they regulate.  Them that can, do; them that can't, regulate.

We saw the same phenomenon in oil regulation - even though bureaucrats in the agency that regulates oil exploration are paid more than private sector workers doing comparable jobs, they're still paid less than people who actually know how to find oil and will always be behind as technology advances.  This effect is beginning to creep into medicine with the passage of Obamacare.  A good high-volume cardiologist can make a half-million a year.  As the coming Obamacare regulations make it more and more difficult to operate a medical office, the best doctors are moving offshore.

The solution isn't to have government agencies do the regulating, it's to turn regulation over to private institutions such as Consumer Reports and Underwriters Labs.  These organizations survive only as long as they maintain credibility with the public.  Their employees have a stake in their survival, so they tend to be careful.

The SEC, in contrast, is put in place by law.  No matter how lousy a job its people do, their jobs are protected by a budget given by Congress; and no matter how upset Congress might be, their only response is to throw the agency more money.  What kind of a punishment is that?

The Securities and Exchange Commission is experiencing a crisis of public esteem, particularly for failing for more than a decade to bust confessed Ponzi-schemer Bernie Madoff and alleged Ponzi-schemer Alan Stanford. This week's $550 million settlement with Goldman Sachs over fraud charges notwithstanding, "Where was the SEC?" has a familiar ring.

The Milken-Boesky follies of the 1980s, the turn-of-the-century parade of financial frauds led by Enron, and the mutual-fund market timing scandal, all resulted in much hand-wringing over how the agency might be more proactive and generally faster off the dime[emphasis added]

So long as there's no way to fire errant employees and so long as the agency's budget has no connection with its performance of its assigned mission, there'll be no way to fix it.

The Fundamental Flaw

It is humanly impossible to expect any government agency to do its job effectively for one simple reason: from top to bottom, the managers and employees have no skin in the game.  Despite the threat of EEOC lawsuits, every private employee knows that if he or she messes up too badly, the boss can quit paying.  The employees as a whole know that if the businesses doesn't pay enough attention to customers, the whole thing can go bust and they'll be on the street.

Government employees, in contrast, can't be fired and they all get paid whether their agency does any actual work or not.  There's no reason to work hard, so few do; there's no reason to work smart, so those who can generally find a much better-paying job in the private sector.

This isn't a new problem.  The difficulty of managing government bureaucracies was documented in detail by Confucius 2,500 years ago.  Unfortunately for the American public, our elected officials have a touching faith in the ability of government agencies to actually solve problems despite all evidence.  However, our founders foresaw this problem and placed the final authority in the American people.

Come November, let's elect officials who're committed to shrinking government.  Since government is utterly ineffective no matter how much we give it, we might as well keep the money and spend it ourselves as we choose.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Bureaucracy.
Reader Comments
Nice work, but you forgot to mention one more disturbing detail... for a government agency, failure is GOOD, because it can be turned into "proof" that the agency is "underfunded"!

A government agency never wants to get caught doing a great job with the money it is allocated.

August 3, 2010 11:56 AM
Here's a classic. The Times reports that a bunch of Indians won $3.5 billion because the Bureau of Indian Affairs mismanaged the land that was placed in trust, supposedly to benefit he Indians.

One problem is that the Republicans want to limit the amount of money the lawyers get and the Democrats don't.

The Senate Balks Again
The Senate's delay in approving $3.4 billion owed to half a million American Indians who were cheated out of land proceeds is compounding a historic injustice.

The settlement arose out of a lawsuit in which Ms. Cobell, a member of the Blackfeet Nation in northern Montana, was the lead plaintiff. The suit charged that the federal government, through mismanagement and malfeasance, had shortchanged accounts it had held in trust since 1887 when Indian lands were placed in federal hands. The lands were then leased for mining and other purposes, with the proceeds going to the trust accounts.

The cumulative shortfall over the years undoubtedly exceed $3.4 billion, which means the settlement is a bargain. The Obama administration would like to see the money paid out. Even so, the Senate balks, in part because a few Democrats aren't happy with the settlement, partly because of delaying tactics from Republicans.

One critical stumbling block has been an amendment from Senator John Barrasso, a Wyoming Republican, who wants to cap lawyers' fees at half the amount approved by the court.

August 5, 2010 8:43 AM
- QUOTATION OF THE DAY - Aug 15, 2010

"Living until 150 years old is impossible in the natural world. But it is not impossible in the world of Japanese public administration."
- AKIRA NEMOTO, director of an elderly services office in Japan, on the many centenarians who live only in government files.

TOKYO - Japan has long boasted of having many of the world's oldest people - testament, many here say, to a society with a superior diet and a commitment to its elderly that is unrivaled in the West.

That was before the police found the body of a man thought to be one of Japan's oldest, at 111 years, mummified in his bed, dead for more than three decades. His daughter, now 81, hid his death to continue collecting his monthly pension payments, the police said.

Alarmed, local governments began sending teams to check on other elderly residents. What they found so far has been anything but encouraging.

A woman thought to be Tokyo's oldest, who would be 113, was last seen in the 1980s. Another woman, who would be the oldest in the world at 125, is also missing, and probably has been for a long time. When city officials tried to visit her at her registered address, they discovered that the site had been turned into a city park, in 1981.

To date, the authorities have been unable to find more than 281 Japanese who had been listed in records as 100 years old or older. Facing a growing public outcry, the country's health minister, Akira Nagatsuma, said officials would meet with every person listed as 110 or older to verify that they are alive; Tokyo officials made the same promise for the 3,000 or so residents listed as 100 and up.

The national hand-wringing over the revelations has reached such proportions that the rising toll of people missing has merited daily, and mournful, media coverage. "Is this the reality of a longevity nation?" lamented an editorial last week in The Mainichi newspaper, one of Japan's biggest dailies.

Among those who officials have confirmed is alive: a 113-year-old woman in the southern prefecture of Saga believed to be the country's oldest person, at least for now.

The soul-searching over the missing old people has hit this rapidly graying country - and tested its sense of self - when it is already grappling with overburdened care facilities for the elderly, criminal schemes that prey on them and the nearly daily discovery of old people who have died alone in their homes.

For the moment, there are no clear answers about what happened to most of the missing centenarians. Is the country witnessing the results of pension fraud on a large scale, or, as most officials maintain, was most of the problem a result of sloppy record keeping? Or was the whole sordid affair, as the gloomiest commentators here are saying, a reflection of disintegrating family ties, as an indifferent younger generation lets its elders drift away into obscurity?

"This is a type of abandonment, through disinterest," said Hiroshi Takahashi, a professor at the International University of Health and Welfare in Tokyo. "Now we see the reality of aging in a more urbanized society where communal bonds are deteriorating."

Officials here tend to play down the psychosocial explanations. While some older people may have simply moved into care facilities, they say, there is a growing suspicion that, as in the case of the mummified corpse, many may already have died.

Officials in the Adachi ward of Tokyo, where the body was found, said they grew suspicious after trying to pay a visit to the man, Sogen Kato. (They were visiting him because the man previously thought to be Tokyo's oldest had died and they wished to congratulate Mr. Kato on his new status.)

They said his daughter gave conflicting excuses, saying at first that he did not want to meet them, and then that he was elsewhere in Japan giving Buddhist sermons. The police moved in after a granddaughter, who also shared the house, admitted that Mr. Kato had not emerged from his bedroom since about 1978.

In a more typical case that took place just blocks from the Mr. Kato's house, relatives of a man listed as 103 years old said he had left home 38 years ago and never returned. The man's son, now 73, told officials that he continued to collect his father's pension "in case he returned one day."

"No one really suspects foul play in these cases," said Manabu Hajikano, director of Adachi's resident registration section. "But it is still a crime if you fail to report a disappearance or death in order to collect pension money."

Some health experts say these cases reflect strains in a society that expects children to care for their parents, instead of placing them in care facilities. They point out that longer life spans mean that children are called upon to take care of their elderly parents at a time when the children are reaching their 70s and are possibly in need of care themselves.

In at least some of the cases, local officials have said, an aged parent disappeared after leaving home under murky circumstances. Experts say that the parents appeared to have suffered from dementia or some other condition that made their care too demanding, and the overburdened family members simply gave up, failing to chase after the elderly people or report their disappearance to the police.

While the authorities have turned up a large number of missing centenarians, demographic experts say they doubt that discoveries of the living or the dead would have much impact on Japan's vaunted life expectancy figures; the country has the world's highest life expectancy - nearly 83 years - according to the World Bank. But officials admit that Japan may have far fewer centenarians than it thought.

"Living until 150 years old is impossible in the natural world," said Akira Nemoto, director of the elderly services section of the Adachi ward office. "But it is not impossible in the world of Japanese public administration."
August 15, 2010 5:59 AM
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