Reinventing “Reinventing Government”

Glenn Reynolds currently has three links on his front page, all with a common theme: problems with government. The first takes note of a recent poll that found that 55% of Americans believe that California should not be bailed out by the federal government but, rather, should be allowed to declare bankruptcy. It’s certainly a dilemma with neither choice being particularly appealing. Allowing California to fail could have secondary effects that would be hard to contain. It may be that California is simply too large to be allowed to fail. But bailing the state out is an awful precedent, especially when one recognizes the straits in which many other states find themselves, and moral hazard would be hard to escape.

In my view something between a no strings attached bailout and simply allowing the state to default should be undertaken, a sort of slow-motion bankruptcy in which the state is placed into receivership and the courts or something of the sort would take the steps that California’s legislators have been unable to take. It could certainly be argued that such a move would be unconstitutional and it very likely would be. As has been said, the Constitution is not a suicide pact.

The second link is to a Cato Institute report on state and local government employee compensation. If you haven’t been following this particular controversy, state and local government workers receive on average a total compensation 45% higher than workers do in the private sector. Benefits account for a substantial proportion of the disparity; benefits for government workers are on average 70% higher than for workers in the private sector. Much of this is because state and local governments are not unlike time capsules: their organizational approaches, principles, and policies are those of a bygone day and state and local government give the sort of benefits to their workers that private companies did 30 years ago and no longer do.

Virtually the entirety of all of the states’ budgets are devoted to a combination of employee compensation and Medicaid and few states have been able to confront either effectively. Some time ago I posted on the Cook County budget. Absent medical expenses the situation is manageable; in the presence of medical expenses rising only at the general rate of inflation the budget will grow faster than any conceivable revenue stream.

The third link is to an op-ed in Forbes by law professor Richard Epstein, proposing that the states enter into an aggressive program of deregulation

On real estate, change the culture so that getting permits for yourself and blocking them for everyone else is no longer the preeminent developer’s skill. The government can still prevent buildings from falling down and fund infrastructure through general taxation. But don’t let entrenched landowners and businesses raise NIMBY politics to a fine art. Today our dysfunctional land-use processes too often build thousands of dollars and years of delay into the price of every square foot of new construction. The instructive requirements on aesthetics and handicap access should be junked, along with the crazy-quilt system of real estate exactions that asks new developments to fund improvements whose benefit largely belongs to incumbent landowners. And for heaven’s sake, learn the lesson of Kelo and stop using the state’s power of condemnation for the benefit or private developers.

tax cuts

On taxation, don’t play the mug’s game of imposing ever higher marginal tax rates on ever lower amounts of income. Play it smart for the long haul. Low-income tax rates (and no estate taxes) will attract into states and communities energetic individuals who would otherwise choose to live and work elsewhere. Treasure their efforts to grow the overall pie. Don’t resent their great wealth, but remember the benefits their successes generate for their employees, customers and suppliers. Repudiate the politics of envy for the social destruction it creates. Don’t fret about the states and communities left behind. Let them adopt the same sound policies to keep people at home. The outcome won’t be a zero-sum game. Enterprise is infectious. Open markets are the rising tide that raises all ships. High taxation is the tsunami that sinks them.

outsourcing, and cutting back services and compensation of present and past employees in order to step back from the fiscal abyss on whose brink they find themselves:

The huge pensions garnered by prison guards in California or transportation workers in New York present the intolerable spectacle of requiring ordinary citizens to pay huge subsidies to union workers far richer than themselves.

There is no likelihood whatever that his advice, whether it is prudent or not, will be heeded. To take just two states, California and Illinois, as examples for California legislators this course would be the political equivalent of seppuku. Were they to makes these moves the Democratic legislators would either be replaced by Republicans as their supporters stayed home in droves or they would be replaced by Democrats who reversed their actions. And in California voters well might undo such a course through the initiative process.

In Illinois it is simply impossible. Legislators simply don’t have the power to reduce state employee compensation or pensions for retired state employees. That would require amending the state’s constitution which in turn requires a supermajority voting in favor. I can’t imagine the two houses of the state legislature doing this even to avoid bankruptcy.

During the first term of the Clinton Administration then-President Bill Clinton embarked on a program that was called “Re-inventing Government”. Headed by his Vice President Al Gore the project sought to update, streamline, and economize the federal government. At the time I was impressed by the boldness and ambition of the plan and dismayed at its fecklessness.

They operated in reverse, implementing reforms during Bill Clinton’s first term and only inquiring what should be done late in his second term. I believe they fell into a trap common in Democratic policy wonks: they over-estimated their own ability and the ability of government to control its own behavior.

In my view the very first thing they should have done is realized that government lacks the competitive pressures which cause the private sector to engage in what economist Joseph Schumpeter called “creative destruction” and institutionalized some mechanisms which would have caused the federal bureaucracy to engage in this process on an ongoing basis rather than in spasms. I can imagine several approaches but none would have been popular in the bureaucracy.

Not only do governments lack competitive pressures but state and local governments operate in the certainty based on experience that, however foolishly they behave, there is a government higher up which can be depended on to save them from the consequences of their folly. The federal government has no such higher savior but that doesn’t stop legislators from operating as though it does. This is sometimes referred to as the “roomful of money” theory of government. Politicians regardless of party or notional ideology have every incentive to act this way and very few to behave otherwise.

The time to reinvent government at all levels was late in the Clinton Administration. Unemployment was low and real income was growing for most people for the first time in decades. Had governments embraced automation and investigated ways to provide more services with fewer people at lower cost, we would not be in the fix we face now. Instead many governments including my city, my county, and my state hired more employees and increased the compensation they were paying to government employees.

We now bear those costs in very different circumstances than those faced when they were imposed, with the enormous likelihood of default, and very little will to do anything about it.

16 comments… add one
  • The Cato Institute report does not control for education levels, which makes it pretty useless. Most public service jobs require a 2-year or 4-year degree.

    It also doesn’t control for full-time vs. part-time, as far as I can tell, which also makes it useless. It doesn’t make sense to compare wages of professional members of the civil service to EVERYONE in the private sector. Wages should be compared to full-time workers with at least 2 years of college.

  • Andy

    It really is a vexing problem with no easy solutions.

    My “ideology,” if one can call it that, is that government authority should be pushed to the lowest level possible because local governance is, theoretically, anyway, more receptive to will of the governed. The current problems with local governance in this country obviously challenge that view.

    As a military person who moves frequently and has seen local governments in many parts of the country, they all act in surprisingly similar ways. For example, when budget problems arise the fearmongering starts with threats to cut essential services like police and the fire department instead of reform in other areas.

    I don’t see any solutions unless and until more of the people – we Americans – become more involved in our government at all levels and that may require the kind of crisis that will negatively impact everyone’s lives. They say that trends begin in California and that state’s crisis today may be a harbinger for the federal government in 20 years.

  • We’ll just make state employee pension plans a right and bingo the money problem will be solved. Ask Michael.

    You know Dave you really need a rolling-eyes icon….

  • In Illinois state employee pension plans are a right (at least as I’d define the term). That hasn’t stopped our state legislators from underfunding them.

  • PD Shaw

    Dave, you mean the section in the Illinois Constitution entitled “Pension and Retirement Rights”?

    “Membership in any pension or retirement system of the
    State, any unit of local government or school district, or
    any agency or instrumentality thereof, shall be an
    enforceable contractual relationship, the benefits of which
    shall not be diminished or impaired.”

    I don’t think that’s a right for taxpayers.

  • I mean that pensions are a right for state employees. My understanding is that this particularly provision has been fully litigated by which I mean that it has been found valid right up to the Illinois Supreme Court (whose members, coincidentally, are eligible for pensions that are protected by this clause).

    My understanding is that the Court has found that the legislature does not have the power absent amending the state’s constitution to avoid paying these pensions or reducing them.

  • PD Shaw

    I’m sorry, I was simply amused that you’d even entertain the possibility that it wasn’t a right when the title of the provision describes it as such.

    Of course, bankruptcy is another way of saying your rights are theoretical.

  • Ah. Even bankruptcy may be no escape. When the line of creditors starts forming, I’d think that constitutionally guaranteed “enforceable contractual relationships” might have some priority.

  • steve

    Amazing that Epstein and his ilk still cling to supply side economics. He, of course, ignores the rent seeking that no estate tax encourages. A fixed group of wealthy people with entrenched power passed down in the family. Royalty. Maybe, Im wrong. Maybe we can successfully concentrate all of our wealth into the hands of the few and they will use it wisely to benefit us all. We see that a lot in history.

    Steve

  • Brett

    Don’t fret about the states and communities left behind. Let them adopt the same sound policies to keep people at home.

    Has he been up in Detroit lately? This is one of those things that sounds oh-so-easy and convincing on paper, which conceals a lot of the ugliness involved in the process. Moreover, there are often many things that make a successful business community, and handwaving away the problems away by saying, “Oh, they’ll adapt the successful solutions!” is no solution at all. Epstein should know better.

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