Don't Touch My Junk: A Practical Critique of Bureaucracy

Well Thanksgiving was last week (hope you all had a great one), and a lot of controversy has been stirred up over the new screening policies (or as some might call them, public displays of affection) of the Transportation and Security Administration (TSA).

Security, as we all can agree, is very important at airports since we don't want another 9/11 on our hands. But is Uncle Sam best suited to keep us safe? The following question was on my exit exam for SDSU, and I elaborated using the TSA as an example:

Do you agree or disagree with the following statement: "Bureaucrats are lazy, inefficient workers who are part of an entrenched, powerful institution?"

To which I responded:

I agree with this statement, for the most part. I'll start with where I disagree. I disagree that ALL bureaucrats are lazy. There are some very civic-minded people working for our bureaucracy that have the best of intentions and have the good of our country at heart and try to do the very best they can.

That being said, bureaucracy, but its very nature is not conducive to efficiency and hard work. In the private sector, workers have to work hard and prove themselves efficient to maintain their job, and the business itself craves efficiency and hard work to maintain profits and remain competitive against other competitors. A private organization's goals are profits.

A bureaucracy's goal, but contrast, is to legitimize its existence. Government workers unionize and strike to protest paycuts, etc. Should a private business become inefficient, the business could become insolvent and fail while the good businesses thrive. If a bureaucracy becomes inefficient and shows few results, a bill will probably be passed to throw more funding at the agency!

Bureaucracies are also very powerful and entrenched institutions. I can't think of a single instance where one was successfully abolished. Abolish the Department of Education? Abolish the Environmental Protection Agency? It seems that once these responsibilities have been ceded to inefficient government, it somehow becomes blasphemy to say that someone other than the government may be better at tackling these issues, and the agencies hence become immortal, and the government has a virtual monopoly over the activity in question.

A perfect current example is the TSA situation, where a lot of people are becoming very unhappy with the extensive scanning the government monopoly (TSA) is requiring at all airports. After 9/11, in rash action to a massive tragedy, the Senate voted 100-0 to approve the TSA, essentially taking over airport security in the United States.

What does the TSA have to lose if they prove inefficient and a shoe bomber or something gets on a plane? They won't be fired, they won't lose customers, and they'll simply have more money dumped into their budget.

Private airlines would best be suited to handle their own airplane security. They have skin in the game and will lose customers if they show to be unsafe airlines or treat customers in a way that will turn them away.

Better yet, the private sector has an advantage, where airlines could exploit niches. One airline may boast themselves as being the safest in the air, and customers know going with that airline will subject them to higher, more invasive levels of screening, and the customer accepts that.

Another airline might realize that other customers would rather keep some dignity and sacrifice some safety on their flight by using lesser screening methods. There is a tradeoff; but customers get to decide for themselves. It's impossible to prevent all the 9/11 type incidents, but since private industry has the most to lose, they also have the most incentive to prevent such a tragedy. Bureaucracy, on the other hand, is one-size-fits all and does not let customers decide what level of security is important to them.

How the Great Depression Really Ended

A lot of people think that FDR ended the Great Depression with his big-government, New Deal policies, but a closer look really shows that his policies in reality perpetuated the depressed economy, rather than fix it. I fear that some of the same actions taken by the current administration are pushing us down the same path, creating a stagnate economy for years to come and provide government with excuses to take from us more of our freedoms in the name of "security."

I read a great book on just this topic which looks into this subject in depth, The Forgotten Man: A New History of the Great Depresson, by Amity Shales, which I highly recommend if your reading list is getting short.

From today's Wall Street Journal:

Did FDR End the Depression?

The economy took off after the postwar Congress cut taxes

By BURTON FOLSOM JR. AND ANITA FOLSOM

'He got us out of the Great Depression." That's probably the most frequent comment made about President Franklin Roosevelt, who died 65 years ago today. Every Democratic president from Truman to Obama has believed it, and each has used FDR's New Deal as a model for expanding the government.

It's a myth. FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II.

Let's start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.

What about World War II? We need to understand that the near-full employment during the conflict was temporary. Ten million to 12 million soldiers overseas and another 10 million to 15 million people making tanks, bullets and war materiel do not a lasting recovery make. The country essentially traded temporary jobs for a skyrocketing national debt. Many of those jobs had little or no value after the war.

No one knew this more than FDR himself. His key advisers were frantic at the possibility of the Great Depression's return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the "right to a useful and remunerative job" provided by the federal government if necessary.

Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR's ideas as the best way to achieve full employment after the war.

Congress—both chambers with Democratic majorities—responded by just saying "no." No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes. Income tax rates were cut across the board. FDR's top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely.

Corporate tax rates were trimmed and FDR's "excess profits" tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945.

Georgia Sen. Walter George, chairman of the Senate Finance Committee, defended the Revenue Act of 1945 with arguments that today we would call "supply-side economics." If the tax bill "has the effect which it is hoped it will have," George said, "it will so stimulate the expansion of business as to bring in a greater total revenue."

He was prophetic. By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The U.S. began running budget surpluses.

Congress substituted the tonic of freedom for FDR's New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

The Great Depression was over, no thanks to FDR. Yet the myth of his New Deal lives on. With the current effort by President Obama to emulate some of FDR's programs to get us out of the recent deep recession, this myth should be laid to rest.

Mr. Folsom, a professor of history at Hillsdale College, is the author of "New Deal or Raw Deal?" (Simon & Schuster, 2008). Mrs. Folsom is director of Hillsdale College's annual Free Market Forum.

My Big Fat Government Takeover

From William McGurn of the Wall Street Journal:

My Big Fat Government Takeover
Rule by the Best and the Brightest

Some mistakes are so big that only smart people are tempted to make them. One is the faith in Big Government.

We'll see that in full force today, when Barack Obama gives another major address on the economy. On the generalities, there won't be much real disagreement. But at a time when many claim to see no difference between the two political parties, President Obama and his Democratic allies are making one distinction paramount: their operating assumption that bigger government is better government.

Associated Press

Many of the people in the Obama administration, the president included, enjoy all the credentials we associate with the best and the brightest: the right schools, the good grades, the successful careers. Alas, whether it be allocating health care or defining the kind of jobs the economy ought to create, the policies they favor suggest a strong belief that they know what's best not just for themselves, but for everyone else too.

Of course, the kind of people who are apt to push for government-imposed solutions are those who are also apt to believe they will be the ones imposing decisions, not the ones who have to live with decisions imposed by others. Sometimes that's because they enjoy the wealth that gives them escape hatches unavailable to the less affluent, such as their ability to ensure that their own children never have to set foot in a public school. Mostly, however, their trust in government reflects their confidence that they have all the answers and that it's government's job to enforce them.

What about conservatives? Don't we have confidence in our judgment and abilities? Of course we do. The difference is that we trust free citizens to make decisions about themselves—and are skeptical about government. As someone who worked inside a White House, I say you really believe government should be small when you see your friends running it.

Now, I know there are people who believe that George W. Bush was a Big Government Republican. And you can make arguments about spending and so forth. Even so, however, there's simply no comparison with the Obama administration.

That's because conservatives believe that even our smartest friend is no match for the collective wisdom of the marketplace. If we were to wake up and find that someone we knew well had been given control over some important part of the economy, the conservative would not likely think, "Everything will be fine now that Harry's in charge." Far more likely we'd be saying to ourselves, "If it weren't for his wife, Harry would be wearing red and purple socks every day—and we're giving him that kind of power?"

Mr. Obama and his team appear to be unburdened by such modesty.

Detroit is in decline because its automotive giants no longer build the kind of cars Americans want to buy? Let's have the president sack the CEO of General Motors, and then use the bailout money as leverage to appoint a car czar and get GM and Chrysler to build the kind of cars that Washington wants.

Wall Street execs are getting sweet bonuses at a time when millions of other Americans are unemployed? Well, instead of encouraging these financial concerns to pay back the Troubled Asset Relief Program monies and get the taxpayers off the hook, send in Ken Feinberg to set their salaries.

Health-care spending is inefficient? The answer is obvious: Expand the Department of Health and Human Services and give its secretary more power. Under the bill now before the Senate, for example, Kathleen Sebelius would have the authority to decide what care insurance companies could offer, who could get an abortion under a government-run plan, what prices were fair, and so on.

Of course we shouldn't draw any conclusions from an advisory task force that recently created a stir when it suggested women get fewer mammograms—and Ms. Sebelius's disavowal in the face of public heat. She pointed out that the task force does not set government policy. But at some point some government task force will—and there will be fewer ways around it.

That's government by the smart. The good news is that it doesn't seem to be selling. According to a recent poll, 57% of Americans believe government is doing things that should be left to business and individuals. Not only do most Americans object, Gallup says the opposition is the "highest such reading in more than a decade."

Today Mr. Obama is going to give us more details about the wonderful things all those smart people in Washington are going to do to help us on the economy. Maybe he would do well to take another look at all those bright lights around him. For the more he proposes government will do, the more skeptical Americans seem to be.

Government+Running a Business=Fail

Here is a great article from the Wall Street Journal, May 21, 2009:

Why Government Can't Run a Business

By JOHN STEELE GORDON

The Obama administration is bent on becoming a major player in -- if not taking over entirely -- America's health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government's track record in running economic enterprises. It is terrible.

In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.

Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.

These examples are not aberrations; they are typical of how governments run enterprises. There are a number of reasons why this is inherently so. Among them are:

1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.

And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot's state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?

2) Politicians need headlines. And this means they have a deep need to do something ("Sen. Snoot Moves on Widget Crisis!"), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn't produce favorable headlines and, indeed, often produces the opposite ("Sen. Snoot Fails to Move on Widget Crisis!").

3) Governments use other people's money. Corporations play with their own money. They are wealth-creating machines in which various people (investors, managers and labor) come together under a defined set of rules in hopes of creating more wealth collectively than they can create separately.

So a labor negotiation in a corporation is a negotiation over how to divide the wealth that is created between stockholders and workers. Each side knows that if they drive too hard a bargain they risk killing the goose that lays golden eggs for both sides. Just ask General Motors and the United Auto Workers.

But when, say, a school board sits down to negotiate with a teachers union or decide how many administrators are needed, the goose is the taxpayer. That's why public-service employees now often have much more generous benefits than their private-sector counterparts. And that's why the New York City public school system had an administrator-to-student ratio 10 times as high as the city's Catholic school system, at least until Mayor Michael Bloomberg (a more than competent businessman before he entered politics) took charge of the system.

4) Government does not tolerate competition. The Obama administration is talking about creating a "public option" that would compete in the health-insurance marketplace with profit-seeking companies. But has a government entity ever competed successfully on a level playing field with private companies? I don't know of one.

5) Government enterprises are almost always monopolies and thus do not face competition at all. But competition is exactly what makes capitalism so successful an economic system. The lack of it has always doomed socialist economies.

When the federal government nationalized the phone system in 1917, justifying it as a wartime measure that would lower costs, it turned it over to the Post Office to run. (The process was called "postalization," a word that should send shivers down the back of any believer in free markets.) But despite the promise of lower prices, practically the first thing the Post Office did when it took over was . . . raise prices.

Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.

6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.

But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government's CEO, but except for trivial matters he can't do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government's broth is so often spoiled.

7) Government is regulated by government. When "postalization" of the nation's phone system appeared imminent in 1917, Theodore Vail, the president of AT&T, admitted that his company was, effectively, a monopoly. But he noted that "all monopolies should be regulated. Government ownership would be an unregulated monopoly."

It is government's job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely -- and rightly -- end up in jail.

But that is exactly what the federal government (which, unlike corporations, decides how to keep its own books) does with Social Security. In the late 1990s, the government was running what it -- and a largely unquestioning Washington press corps -- called budget "surpluses." But the national debt still increased in every single one of those years because the government was borrowing money to create the "surpluses."

Capitalism isn't perfect. Indeed, to paraphrase Winston Churchill's famous description of democracy, it's the worst economic system except for all the others. But the inescapable fact is that only the profit motive and competition keep enterprises lean, efficient, innovative and customer-oriented.

Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).