Unlike the private sector, where operational efficiency is necessary to survive, the public sector is and always has been inherently inefficient. But that’s not the main problem. Think of federal public polices justified as being in the “public interest” as a building. On the upper floors are the best of them, the merely inefficient. At the mezzanine level are those suffering from extensive waste, fraud and abuse. On the ground floor are policies and programs rife with self-dealing and crony capitalism. Down in the basement is the “temple of virtue” where taxpayers are sacrificed to multiple ideological isms.
DOGE is peeking inside the locked doors on all four levels. As DOGE exposes “Dirty Deeds, Done Dirt Cheap,” politicians cry foul, as “they were implemented (by us) democratically. To paraphrase Churchill, “democracy is less bad than totalitarianism,” but, he might have added “generally worse than competitive private markets.” At this stage in US democracy, DOGE revelations have lost some of their shock value as commonplace, and politicians emphasize their good intent. DOGE needs to demonstrate that “good intentions” often lead to bad outcomes, and do not justify corruption in any case.
DOGE alone can only win a few skirmishes against Congress and its massive army of rent-seekers feeding off their largess. With public understanding and support, the Trump Administration could bring about more permanent structural changes that provide greater voter control.
Life is a Competition
Americans love sports, from 5 & 6-year-old soccer leagues through high school, college and pro teams, where the competition to succeed is intense. Pro sports is a business, as the recent Luka Donic trade to the Lakers reminds us, with winners and losers. It is incredibly “democratic” as millions of fans choose what players to follow, games to attend or stream at the posted price, and owners respond continuously to fan expectations. The competition is subject to a massive set of complicated rules and limitations enforced by referees and judges whose integrity is subjected to coaches’ challenge, instant replay and fan fury. That reflects the system of checks and balances that a competitive private market incorporates.
Now imagine a pro sports league designed and governed by the most honest and altruistic national politicians. They would deem it unfair to pay some athletes more than others, or to exclude the weak or physically impaired from the competition. Winners would be determined by political deal making in smoke-filled back rooms. Prices would be determined according to “ability to pay” and ticket purchases would be mandatory whether or not attending the games, with revenues first flowing through party coffers. Fans would be told who to root for and losing teams and cities would be declared winners so as not to result in hurt feelings. Voting against this system would result in your team being designated the loser but you would still be required to buy the tickets. That’s a metaphor for our current “altruistic” federal democracy.
What is the “Public Interest”?
To most US politicians, generally trained in the law, it is legislation stating an intent to serve some segment of the general public. Most economists have a much different definition: to start with, the attributes of a well-functioning competitive market serve the public interest more efficiently and effectively than any alternative. Every individual has the freedom to achieve their maximum potential and enjoy the fruits of their labors so long as they do not violate the rights of others. The entire system resembles a living organism, constantly shedding the old and adapting to the new, growing bigger and stronger.
It isn’t without flaws, but it is generally self-correcting. A firm with multiple product lines, for example, may “fail” to maximize the profitability of each one due to lack of focus, but market discipline forces corrective action, e.g., to spin off subsidiaries to stand or fail on their own. As private firms grow larger and family businesses and partnerships corporatize, owners face a bigger problem of keeping the incentives of managers (their agents) aligned with their own. Again, owners take numerous measures (e.g., stock options, employee profit sharing) to mitigate this problem before facing failure. It is the private sector’s incentive and control mechanisms that force it to continuously adapt to its environment and self-correct, producing the greatest possible rise in living standards for all.
Economists who agree with this benchmark still have lots of theories to support an ever-expanding public sector to either complement it or to improve its functioning.
The complement is “public goods” – those that anybody has access to without paying and without limiting the access of others. While federal politicians take an expansive view of public goods, the list was never very big and has been shrinking due to technological advances. The best example, national defense, ignores George Washington’s first victory, over the private Hessian army in 1776. A simple chip solves the “free rider” problem in many goods, e.g., vehicles on roads.
Economist Arthur Pigou first identified “market failures” in 1920, which theoretically could be corrected with tax, subsidy and regulatory policies. Economists’ search for “market failures” (anything short of perfection) over the last half century has dominated the profession, exposing mostly self-correcting imperfections.
Why Public Policy Fails the Public Interest
Based on his experience in the Clinton Administration, Robert Rubin cautioned DOGE, justifying inefficiency because “In government, there are multiple important and competing objectives” (The Limits of Running Government Like a Business,” Saturday/Sunday, January 18-19). Lack of focus is an explanation but not a justification: During Rubin’s prior 26 years at Goldman Sachs, any private sector firm that claimed to have multiple and competing objectives would have been subjected to a hostile takeover to hold (often new) management accountable for one, maximizing profitability (shareholder value).
The federal government is providing many products and (mostly) services that do not strictly qualify as public goods (e.g., health insurance, SS retirement benefits). There is a (now often historical) private sector counterpart for many of the services provided by state and local governments as well.
The public sector has no incentive to run them efficiently or effectively because the incentives facing politicians aren’t aligned with the public interest, and the incentives of government bureaucrats aren’t aligned with either those of politicians or the public. Taxpayer discipline is skirted by issuing debt and, for the federal government, by printing money. The federal government faces no effective bankruptcy constraint and fiscally reckless states expect a federal bailout, generally opaque. Voters have neither the power nor the incentive to align these incentives with the public interest. Ideologues and crony capitalists – often one and the same – capture politicians in pursuit of private interests not compatible with the public interest.
Pigou’s theory that the public sector will succeed where the private sector fails is also trumped by agency theory. The federal regulatory role in finance and insurance is most representative. The failure of firms, particularly in the financial sector (e.g., depository institutions), can be socially disruptive, so the federal government has protected the customers while opaquely bailing out failed firms. This undermines both customer and shareholder vigilance, displacing market discipline, often ultimately resulting in systemic failure. Rather than admit this, politicians double down with more regulation.
Goldman like most investment banks was a partnership requiring managers to “have skin in the game” during Rubin’s tenure to mitigate conflicts. Most large investment and commercial banks failed in the aftermath of the 2008 financial crisis after they incorporated. They then sought – and got – crony capitalist political protection. Failed regulation often leads to the creation of public entities “to fill the void,” further driving out the private sector.
Some economists, and it would appear many politicians, find the inherent income inequality of our current political and economic system unacceptable. (This is generally not the view of the populace, who consider the corruption of the often-anti-capitalist politicians offensive, not the big bonus to entrepreneurial innovation, which pays dividend to all.) All totalitarian governments start with paternalistic empathetic goals of “equity” and “equality. Initially, communism and socialism assumed public ownership of the means of production, but today’s “democratic socialists” and” progressives” as well as contemporary “environmentalist” and “racist” (mostly black, including DEI, with white racist backlash) political movements implicitly endorse fascist governance to achieve their ends.
All of these originally socialist principles are marketed under a “democratic” banner. Most of the alphabet agencies within the DC edifices house central planning agencies from the earliest Agriculture to the more recent Education Department. All such systems fail on their own, but can survive at length as a tumor on the capitalist system.
Public Interest Structural Reforms
The only potentially effective way to minimize this principle/agent conflict is the US Constitution limited government prescription (the preamble’s “general welfare” phraseology or subsequent amendments not withstanding). What matters isn’t what government could theoretically do, but what it will do. Reform is hard. Politicians who ignored the Constitution’s limited federal powers when enacting expansive government protest that reforms violate “the rule of law.” Congress has not demonstrated a willingness to govern its own behavior or provide effective oversight of the administrative state. Hence DOGE should adopt and the Trump Administration implement some constitutionally grounded limited government principles that provide greater control to the citizenry.
I do not begrudge Ben Franklin, one of the greatest founding fathers and smartest of his century, his personal US post office. But in spite of every attempt to separate USPS from the federal government and make it competitive and self-sufficient, USPS lost almost $10 billion last year in spite of direct subsidies to cover its special services, while UPS made that amount (after taxes). In general, if something done by the public sector could be done in part or entirely by the private sector, it should be.
Enabling various forms of political corruption is the primary motivation for federal funding of ground and mezzanine floor policies and programs. If something could be done by the states (e.g., FEMA) it should be, with state funding.
Some large states, like California, have most of the undesirable attributes of the federal government. If something done by the states could be done by local government, it should be, with local funding.
Local governments fund many services with general revenues. If something done by a local government could be done by an independently funded and managed corporatized entity governed by a board (e.g., utilities, libraries, school boards, etc.) staffed by customers, it should be.
If we really want to “save our democracy,” shouldn’t we make it accountable to the public?
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Kevin Villani
Drucker on bureaucracy:
https://chicagoboyz.net/archives/36645.html