Incentives Matter

This Washington Post article and this Huffington Post article discuss a recent Senate investigation into a $1.4 billion Department of Homeland Security (DHS) program fraught with waste:

...the report documents spending on items that did little to help share intelligence, including gadgets such as “shirt button” cameras, $6,000 laptops and big-screen televisions. One fusion center spent $45,000 on a decked-out SUV that a city official used for commuting. (WaPo)

Also:

A marquee federal effort to share intelligence about terror threats with state and local law enforcers has produced no evidence of any. But it does appear to have caught a motorcycle gang telling members to obey laws, suspicious fishing at the border, and Muslims offering advice on marriage, success and reading. (HuffPo)

The waste present in this DHS program is a microcosm of a larger problem, namely that the federal government does not seem capable of managing the myriad of different, and often overlapping, programs it administers. Even programs deemed "[centerpieces] of U.S. counterterrorism strategy" by DHS chief Janet Napolitano are not immune to government mismanagement and waste.

The waste uncovered in this Senate investigation reminded me of an argument my liberal/progressive friends have used, in which they claim that centralizing government functions and programs at the federal level will lead to greater economies of scale.

This argument is intellectually tempting, but in reality breaks down for two primary reasons: 1) the federal government is convoluted and has undertaken too many functions to capture economies of scale, and 2) the federal government lacks incentives to organize itself efficiently, which is required to capture economies of scale.

Let's put federal spending into perspective. The feds spent ~$3.5 trillion in FY2012. Subtracting the $780B spent on Social Security transfer payments leaves ~$2.72T...or 7.8x what Wal-Mart spends on stocking their shelves and paying their store employees. To manage $2.7T in spending, and on top of that judge whether this cash is being well spent, is an undertaking that requires exceptional organizational efficiency, not exactly something the government is known for.

My bias, right or wrong, is that our federal government has undertaken too many functions and is not efficiently managing most, if any, of them. Even nonpartisan functions like infrastructure, education, and national security are fraught with waste and inefficiencies.

Rather than mismanaging thousands of programs, the federal government should focus on a select number of functions, preferably those defined in Article I Section 8 of the Constitution (plus any future amendments that expand these powers), and manage them well.

The mismanagement problem is compounded by another of government's weak points: incentives. What inherent incentives motivate the federal government to be efficient with our tax dollars?

We can't say the media, which in theory should function as a government watch dog, but in reality more closely resembles an annoying pack of yippity chihuahuas who never shut up.

We can't say voting because elections seem to be more about political brands and less about ideology, as discussed in my last post. And we can't say partisan politics because government inefficiency is one of the few things in Washington DC that reaches across the aisle.

The answer is more basic. The federal government has little incentive to spend our tax dollars wisely because the federal government is free from competitive forces, which would incentivize it to operate efficiently. Furthermore, the government has a captive customer base. Americans are forced to give the government money, and if we refuse, we are sent to jail. This dynamic does not bode well for efficiency. Government has little to no incentive to spend our money wisely (as evidenced by the DHS's "shirt button" cameras and pimped out SUVs).

Competition always benefits the consumer. It's a truth that innately makes sense--organizations operating in competitive markets are constantly innovating processes that increase efficiency, improve customer service, and lower costs.

An organization with no competition and captive customers is a monopoly. And monopolies are monopolies because they are able to serve themselves before, or in lieu of, serving their customers. Sound familiar?

The recession has been good to DC, judging from the number of construction cranes shown here. 

I think it's time we bust our federal monopoly and elect candidates who want to divest federal programs back to the state and local levels. But that's a whole different blog post.