Kling’s questions on governmment

Arnold Kling posts some questions on government. He doesn’t expect answers, but I’m going to provide them (for my own entertainment).

1. Is government subject to diminishing returns to scope? In the business world, it is usually considered a better strategy to stick to one purpose rather than to constantly get into new lines of business. The thinking is that if you try to combine too many businesses, you end up being ineffective. Does this consideration apply to government? If not, why not?

The problem here is that in business, there’s a clear and measurable indication of success and failure: profit.

In government, there’s just as clear an indication of success and failure: power. In government, the more power you have, the more successful you are, by definition. The more lines of business you have, the better. The success of increasing power is not to be confused with efficiency – they are unrelated. Who cares about efficiency?

Thus, diminishing returns to scope don’t kick in. Success in government is identical to scope. The bigger your scope the more successful you are.

2. Are government monopolies efficient? In theory, in the business world monopoly is efficient, because it eliminates duplicate overhead. (Monopoly is inefficient in theory because the monopolist charges a price that is too high, but we might suppose that government will not do that.) In practice, however, monopoly is inefficient because without the pressure of competition, business practices tend to stagnate. Is government immune from this stagnation problem, and if so, how?


3. Most new businesses disappear within a few years. Most government programs persist. Does this persistence indicate that government is more effective than the private sector at choosing carefully which initiatives to undertake, less effective at choosing which initiatives to terminate, or both?

See 1. All that matters is scope of control. The fact that you control an obsolete area is immaterial – you are by definition effective, since you control an area. Your challenge is to milk it for all it’s worth.

4. Because of the profit and loss system, businesses are accountable to some extent for keeping their promises. (There are weaknesses in accountability mechanisms, to be sure. Most notably, an executive with a short-term focus can gain personally while making decisions with adverse long-term consequences.) In government, the main accountability mechanism is an election. But most government workers are not subject to elections, and elections are very crude expressions of voter preferences. Overall, is the accountability mechanism in government nearly as effective as that in business?

No, in fact, in many cases, there is an anti-accountability mechanism. If you fail in some ways, your budget may increase.

In another post, Kling suggested that he liked President Obama’s re-org proposal. A government re-org is not a re-org in the private sense of the word. Instead of increasing efficiency, a government re-org will be co-opted to increase the power of certain people in government. It thus becomes a power struggle. In a government re-org, no one actual government employee would lose his job (at least not for long). Moving the deck chairs on the Titanic is not a re-org. Proposals like this will be co-opted by the bureaucracy and used to increase their power. It’s almost better not to talk about the problem.


12 Responses to Kling’s questions on governmment

  1. asdf says:

    Most of this is true in large private organizations, to a lessor degree. Depending on the industry and company, profit is so much less of a feedback mechanism then people think.

    • SkepticalCynical says:

      That’s true, to a degree. Certainly big companies harbor some spectacularly useless employees/departments who behave exactly as Foseti describes their public sector counterparts.

      But very few companies are so big that the government will actually bail them out. For most companies, there is a limit somewhere, beyond which the CEO will get canned, the consultants will be brought in, 60% of the employees will get fired, the factories will get shipped to China, etc.

      Where is the limit beyond which the bureaucratic state fails and shrinks?

      • asdf says:

        Here’s the thing though. The profit motive doesn’t mean the long term profit motive. In a publicly traded company it means next quarter. Its always easier to juice numbers in the short term vs the long term. When things go wrong these people usually land on their feet at other companies anyway.

        When I look at large public corporations, I see gigantic principal/agent problems. The profit motive makes all sorts of assumptions about the way business works that aren’t necessarily true.

        Perhaps I am extra sensitive to this because I’m working as an actuary now, and my job is basically to tell people what they can’t do because of the long term health of the company. People shit on public sector job security, but it was invented in the hopes of making people look to the long term. I’ve been at companies with a chief actuary gets canned so that they can bring in a guy that will sign off on bad assumptions because it will juice sales and you won’t see the negatives for many years. Those organizations could have used more job security not less. Even if that sometimes meant people browsed the internet a little at work.

      • spandrell says:

        my thoughts exactly. After a certain threshold of size any human organization loses sight of incentives.

        Anti-trust should be reformed and any non-utility related company should be cut and sliced after reaching 1k employees.

      • josh says:

        Almost everything today is a lie. Why would corporations be any different. It’s much worse than principle/agent problems, btw. That makes it sound like an accident.

      • tenkev says:

        In theory the stock price contains the Net Present Value of all future dividends; so, it would be incorrect to say “the profit motive doesn’t mean the long term profit motive”. Now, of course, there are always errors in valuation that would be exceptions to the rule; but, to equate the lack of feedback mechanism in government organizations with that of for-profit organizations (however large) is to compare mountains to molehills.

        I do agree with the general idea, of course, that larger private organizations are less able to parse information from changes in profit/stock price.

      • asdf says:

        I don’t much believe in stock prices as a mechanism to cause long term planning by managers. If anything, its the exact opposite.

      • tenkev says:

        Clearly, if a CEO is paid in stock or stock options, he has an incentive to try to maximize stock price (i.e. value of current and future dividends).

  2. dearieme says:

    “Where is the limit beyond which the bureaucratic state fails and shrinks?” When everyone is so pissed off with it that no one lifts a finger when the Goths arrive.

    (See, for example, France 1940)

  3. rightsaidfred says:

    Can we say that governments learn? The Bolsheviks and Mao overreached by bringing agriculture into the loving embrace of bureaucracy, among other dicey power plays; since then governments have taken a lighter touch (except for Zimbabwe et al).

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