Wednesday, February 27, 2008

More on Hamiltonian Government

Governments face three problems that place limitation on what they can do. First, governments have a problem with incentives. The intention behind many government programs and policies tend to be good and praiseworthy. Most of the people that work for a government are honorable and well-meaning individuals. The problem is aligning objectives with incentives so as to achieve and continue to achieve the goals that the programs or policies are attempting to achieve. Appropriate incentives are often difficult to set anywhere, but in government, where there are so many things that people want to accomplish, incentives are not always clearly defined or clearly understood. It is easy in the business world to say that the goal of a business is to maximize shareholder wealth. It is not so easy to define such specific goals in the world of government. Furthermore, objectives may change over time. Many agencies set up by the government, say, to regulate an industry, often become advocates for the industry over time.

Second, governments don’t come close to having all of the information they need in order to resolve the problems that the proponents of government would like them to solve. Friedrich Hayek pointed this fact out many years ago. For example, a large amount of the information needed to execute a government program or policy is ‘local’ information and is present only in the dispersed locations of those affected. Gathering information is costly and the costs of obtaining more and more information are generally not linear. Thus, to get the appropriate information to a centralized location so that a decision can be made, return the decision to the local authorities and then execute the decision at the local level is both expensive and time consuming.

Third, governments are less and less able to keep up with the speed at which the world is changing. Today, even businesses have trouble keeping up with the pace at which change is taking place. The problem is right there from the start of a program or a policy. Programs and policies never seem to be developed in anticipation of something happening. Most politicians don’t want to go out on a limb and introduce legislation for a problem that doesn’t exist. First of all, no one else will be interested in the legislation because it is not a pressing need and in the second place, there are too many other things a politician has to respond to that tend to grab his/her attention. The response in the U. S. Congress to the problems in housing is a case in point. The problem has occurred. Congress is trying to respond to the pain.

The difficulty with this is that by the time the programs or policies are enacted, staffed and execution attempted, the world has moved on. Governments, both bureaucrats and politicians, are, in a real sense, always fighting the last war. And, with events occurring within shorter and shorter time intervals, this difficulty is going to get worse not better.

The conclusion one reaches from considering these three factors is that governments have difficulties getting people to do the things they want done, don’t usually have the information they need to make the decisions that need to be made, and tend to be behind the curve in terms of executing and administering the programs or policies it does put into place. Any one of these difficulties can reduce the effectiveness of a program or a policy. If all three of them are working the hopes for the successful delivery of a program or policy can only be wishful thinking. If this is a realistic description of the environment that a government works within then the programs and policies that the government does enact and administer should take these factors into account.

Let’s discuss these issues a little further. In terms of information, I believe that the government should encourage and support the spread of information throughout a society. And, improving the flow of information should be a goal of the government itself. That is, a government should encourage as much openness and transparency of its operations as possible. It is interesting and important to me that someone like former Treasury Secretary Robert Rubin in his book “In an Uncertain World: Tough Choices from Wall Street to Washington” argued very strongly for openness and transparency in his efforts to resolve important issues that impacted not only his Treasury Department, but the whole of the U. S. Government, foreign governments, and the world. In an uncertain world, restricting or limiting information is not helpful and we should err on the side of too much information rather than too little. I will say more on this in another post.

Government programs and policies affecting the private sector should be aimed at setting up and achieving process; not outcomes. What I mean by this is that a government should set up the rules of the game and then oversee the maintenance of this process. Establishing and maintaining private property and the rule of law are major components of a government that wants to support a free and open capitalistic society. What is important here is that the government facilitates the operation of the society, it does not dictate the results of the society. Incentives can then be established relative to the creation and establishment of the process and not toward specific output goals and objectives. This is important in an uncertain world.

Finally, government programs and policies must transcend the need to be real time orientated. The problems and difficulties of a society should be attacked by the problem solving and decision making capabilities of those within the society itself. Not only are the individuals directly impacted by these problems and difficulties immediately involved with what is going on, they are the first line of defense in the society to resolve them in a timely fashion. What the government needs to create are programs and policies that provide the people and organizations within the society with the tools and information sources they need in order to operate as efficiently and effectively as possible. It is the private sector that must adjust to changing situations, not the government.

In terms of this last point, one cannot say enough about governmental programs and policies that support education and the education system in the society. Not only does a first-class education system provide positive externalities within a society like a highly educated and networked work force, it also creates problem solving skills and the ability to find information and use information in the best ways possible. The support of programs and policies for a superior education system transcends the ‘real time’ problem faced by those programs and policies of a government aimed at responding to a current crisis. The educational system will help to create individuals and organizations that are present and capable, and have the tools to handle these situations in a smoother, timelier, and more incremental way.

This brings us back to two major issues of modern society: change and the ability to meet change. A highly educated and networked society is going to be causing change to take place. Learning takes place by absorbing new information, relating that information to what is already known, and then using this relationship to solve more complex problems and make better decisions. But, solving more complex problems and making better decisions moves the society along: it creates change. The ability to meet change comes from the same process. People must not be afraid of new information. It is the fear of the new, fear of new information that creates a resistance to change. A highly educated and networked society learn that new information, if smoothly incorporated into the society’s base of knowledge, is not a threat. The change that accompanies the spread of new information should be viewed as an opportunity, not an enemy.

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