Why Government Fails So Often: And How It Can Do Better (22 page)

Ordinary citizens have little or no rational incentive to participate actively in political activity
. More than a half century ago, Anthony Downs published
An Economic Theory of Democracy
, in which he applied simple cost-benefit analysis (CBA) to a citizen’s decision whether to vote and to otherwise participate in government. He showed that, as noted earlier, no ordinary rational individual would do so given the costs of registering, traveling to the polling place, informing herself about the relevant issues, and so on, compared with the benefits of doing so, which are practically nonexistent because of the unlikelihood that her vote would affect the outcome. Other forms of participation are even more costly. This implies that those who do participate in politics will disproportionately have large, focused
stakes that can be protected by joining to form an interest group with others who also have relatively large, focused stakes.

The manifest fact that a large number of Americans not only vote but join environmental, civil rights, pro-or antiabortion, religious, or other politically active voluntary groups does not mean that they are irrational. Instead it means that they seek through these activities to advance values that are not self-interested in the narrow, conventional sense but are more broadly self-fulfilling. This claim is not tautological; it rests on vast empirical evidence. That is, citizens report that they derive ideological, social, participatory, or expressive satisfactions from such activities, and they are willing to sacrifice some of their leisure and other resources to gain those satisfactions. In these ways they also signal to others in their community that they have certain types of values and commitments and are in that sense good, reliable people meriting respect and reciprocity.
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Finally, and most important, these efforts often succeed not only in mobilizing disparate citizens for political action but in winning particular policy battles—outcomes not predicted by the dominant theory of collective action, discussed just below.

Political actors design policymaking institutions and processes to advance their self-interest
. Legislators are for the most part professional career politicians who seek to maximize their chances of reelection. This requires, among other things, attracting financial, media, reputational, and other forms of support from those groups with the incentives and ability to deliver this support and that also have a special interest in the resources that legislators control: access, status, legislation, valuable information, favorable publicity, government subsidies, regulatory supervision by friendly officials, and much more. Legislators deploy their broad-ranging powers to enact statutes; shape the agendas, discretion, staffing, and budget of administrative agencies; manipulate appropriations; hold hearings; seek publicity and credit; and use countless other influence-enhancing techniques in order to position themselves to deliver what favored interests and supporters—those who are in a position to secure their
reelection—want. Congress organizes its internal rules and its committees’ jurisdictions and assignments so as to serve members’ electoral interests. Similarly, members use their party connections and other influence over state legislators who control the redistricting process to maximize the electoral prospects of their parties and themselves.

Agency officials, for their part, use their delegated authority in ways that, consistent with their legal duties, are calculated to increase their political and budgetary support and their future earnings, professional status, and job security. Federal judges, who enjoy life tenure and thus need not pander to voters or politicians, tend to interpret the law in ways that advance their own conceptions of justice and policy, which tend to correspond closely (though not entirely) with the policy preferences of the president who appointed them and the one who might promote them.
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(The nature of legal reasoning and adjudication renders judges’ incentives more obscure than those of other officials, but the literature on judicial decision making supports this general claim.)

The political effectiveness of a group depends, among other things, on its ability to manage incentives so as to overcome structural obstacles to collective action
. Not all interest groups manage to sustain themselves, much less succeed in being politically effective. In a seminal book,
The Logic of Collective Action
, economist Mancur Olson explains why some groups manage to succeed more than others. In order to have even a chance at success, a group must attract the resources—financial, social, skills, and so forth—that it needs to do its work while minimizing its organization and maintenance costs. The organization costs for groups are higher to the extent that they are vulnerable to various cost-increasing opportunistic behaviors on the part of potential members. The most important of these behaviors, the “free rider effect,” encourages those who might contribute such resources to try to benefit from the group’s efforts without contributing to them. Two other impediments to collective action are opportunistic behavior by holdouts, whose strategic position enables them to extract an especially high price for their cooperation, and informational asymmetries that encourage exploitation.

Groups may be able to solve these collective action problems by tailoring incentives—with free riders, for example, by providing members with valuable benefits, such as group insurance or trips, that can be withheld from nonmembers. A group’s vulnerability to such collective action problems depends on factors such as the distribution and heterogeneity of information, costs, and benefits among its members. Thus, groups whose members have low, diffuse stakes and information tend to wield less political influence than those with concentrated, high-stakes, well-informed memberships. Although the sheer number of a group’s members matters in achieving policy influence, these other factors count for more because they affect the group’s unity and ability to act collectively at low cost. Nevertheless, a group’s diffuseness by no means dictates its political destiny. That disadvantage can and often is outweighed by other political assets—an important point discussed in
chapter 3
(under “interest group pluralism”).
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Officials have powerful incentives to provide voters and interest groups with short-term benefits and to hide the long-term costs that must pay for those benefits
. Politicians have short time horizons tied to the electoral cycle and to their need to “do something” in the presence of a crisis, such as the 9/11 attack, the 2008 financial meltdown,
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the protracted “fiscal cliff” imbroglio of 2012–13, and the government shutdown of October 2013. Radically present-oriented, their incentive is to devise ways to quickly bestow benefits on their constituents, exaggerating those benefits while hiding the costs. Various tried and true cost-hiding techniques are available.
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They may simply
ignore
the costs, pretending that their constituents are getting a free lunch while hoping that no powerful interest will blow the whistle and reveal the deception. They may treat a resource as if it were
free
. The Federal Communications Commission, for example, wants to expand broadband by “repacking” areas of spectrum used by TV broadcasters to free up and then auction other frequencies for broadband use, despite the broadcasters’ fears that this will degrade signal quality.
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Another cost-hiding technique is for elected officials to delegate the tough, costly decisions to agencies, to which they can
later deflect blame when the costs prove unpopular. They may disguise the costs, concealing them as off-budget programs like Fannie Mae, explicit or implicit loan guarantees, or “tax expenditures” like the home mortgage interest deduction. They may defer the costs, as with deficit financing whose interest obligations will not come due for decades. They may use unfunded mandates and pork barrel projects to shift the costs disproportionately to nonconstituent taxpayers and state and local governments. I discuss other policy consequences of policymakers’ short time horizons in
chapter 6
’s discussion of inflexibility and in later chapters.

The political dynamics of a public policy depend on how it distributes its benefits and costs among voters and groups
. In
The Politics of Regulation
(1980), political scientist James Q. Wilson distinguished four types of politics, which he associated with four different distributions of costs and benefits. (He was writing about regulation, but the taxonomy applies also to other types of policy making.) Where the policy concentrates both the costs and the benefits on a relatively small number of people or groups, it will be characterized by what Wilson called “interest group politics” in which both sides—the putative beneficiaries and cost-bearers—can readily mobilize to advance their interests (in maximizing benefits and minimizing costs, respectively). Examples include rate regulation like that between well-organized shippers and carriers, and public-sector wage bargaining. Where both the benefits and the costs are widely dispersed among the population, “majoritarian politics” will prevail in which political entrepreneurs will make broad-based appeals to the public interest. Where the benefits are dispersed but the costs are concentrated, “entrepreneurial politics” prevails, in which a “public interest” advocate launches a crusade against, say, the tobacco industry, enacting a smoking ban or raising cigarette taxes. And where the benefits are concentrated but the costs are dispersed, we will find “client politics” in which the relatively small group of beneficiaries—say, an industry and its workers protected by import barriers—will be able to exploit their Olsonian advantage over the diffuse, unorganized interests of consumers who will each have to pay only a tiny bit more for the
industry’s product. Politicians who promote this kind of policy are duly rewarded by its winners, while its far more numerous losers will each bear a cost so small that they may not even notice it, much less organize to defeat it. Politicians are adept at designing policies that exhibit this incentive structure—for example, choosing “carrots” over “sticks” in programs designed to shape private behavior.
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Such policies in turn tend to generate political rewards. This behavior is so endemic and so indifferent to the general public’s more diffuse interests, that it has created what Jonathan Rauch calls “demosclerosis,” a deeply pathological condition.
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Much political activity consists of narrow-interest logrolling at the expense of taxpayers
. I noted in
chapter 2
that differences in the intensity of preferences among voters and groups can be a potent source of political leverage. A small minority (A) can gain majority support for its favored policy by trading its votes on an issue about which another minority (B) is passionate but on which A is relatively indifferent, in exchange for B’s votes on the issue about which A is passionate. These minorities may be very small; indeed, Olson’s theory of collective action suggests that the smaller the group, the easier and cheaper it will be for it to organize itself for political action, other things being equal. The incentives-driven logic of this logrolling means that small and narrow but intense and well-organized groups are able to form coalitions that can gain majority political support for policies whose benefits will be enjoyed disproportionately by the coalition but whose costs will be borne disproportionately by the vast majority of unorganized, often unaware taxpayers.
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In this classic dynamic, a member of Congress strategically placed on the right appropriations subcommittee can gain approval for “bridges to nowhere”—projects that would clearly fail a CBA or cost-effectiveness test but create jobs, contracts, and favors of value only to locals, although it is unwitting taxpayers across the country who pay the bill. But this logrolling strategy is by no means confined to wasteful (in a CBA or cost-effectiveness sense) projects, nor are its results always condemned. Indeed, the essence of this strategy—trading votes according to different levels of preference
intensity—underlies many politically successful coalitions, with the variables being the narrowness of the beneficiary class and the distribution of costs and benefits. For example, the food stamp program (discussed in
chapter 11
) exists because of a bargain struck by politicians from urbanized, high-poverty districts and those representing rural areas eager to sell agricultural products.
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Indeed, this bargain has benefited liberals far more than they could have imagined back in the 1970s, when only one in fifty Americans received these benefits. Today, one in seven receives them; their value constitutes some 80 percent of the subsidies under the farm bill.
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The 2013 law that funded benefits for the victims of Hurricane Sandy contained a number of costly earmarks for favored constituencies, including $1.7 billion for highway construction, most of which will go to areas unaffected by Sandy, and $247 million for Coast Guard spending in the Bahamas and the Great Lakes.
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Moral hazard is a major source of incentive-based programmatic failure
. Congress has long sought to manage risks of all kinds through laws that spread, shift, or reduce them.
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In doing so, these programs often generate moral hazard—the propensity to take on more risk when one knows that others will bear much of the expected cost of that risk—which may create new risks that may be even worse and harder to manage. Found in both market and nonmarket contexts, moral hazard encourages rational, incentives-driven conduct that increases the risk of loss, other things being equal. In one kind of moral hazard, an actor takes on more risk because he knows that the costs of that riskier behavior will be borne in whole or in part by someone else: government/taxpayers, an insurer, parents, or another ultimate risk-bearer. Moral hazard may occur where information about risk and the ability to reduce it is asymmetric so that potential risk-bearers cannot readily predict, monitor, or control the risk-taker’s choices. When a risk-taker knows more about a risk’s nature, level, costs, and benefits than the risk-bearer does, the latter cannot optimally manage the risk by accurately pricing or otherwise controlling it. As we shall see, moral hazard also occurs when a program creates incentives for
an actor to behave in a way that is advantageous to him but perversely undermines the program’s intent.