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Two centuries of American governance has revealed one small idea on which both liberals and conservatives can agree: all government employees, regardless of their individual political views, seek to have their agencies' budgets increased. Regardless of what any individual bureaucrat believes the agency is or should be doing, every last one agrees that it needs more money.
People who work for private businesses have the same attitude, particularly when it comes to wanting their own pay to go up, but there's a problem. In order for a private business to spend more money, it has to find more customers who are willing to hand over their cold, hard cash in return for whatever the business offers. A business can spend more money than it takes in for only a very short time, at the sufferance of a bank or group of lenders. If a business can't quickly find enough customers to cover its costs, it goes under and its ex-employees find themselves out on the street.
Government agencies, in contrast, have no such difficulties. Instead of persuading customers to give them money one at a time, all they have to do is persuade their legislators to vote them money. In turn, legislators pass another bill confiscating the money from taxpayers. It isn't their money, so politicians are always far more inclined to hand it out without worrying about getting good results than if it were.
It always looks better if the agency can give the legislators an argument why their budget should be increased. Thus, agency incentives are set up to make it easier to argue for more money in the next budget.
When an agency such as the department which was responsible for regulating offshore oil drilling manages to persuade Congress to give them money directly by taxing the activity they regulate, they're disconnected even from this need to justify their existence and end up doing whatever they like. The Minerals Management Service (MMS) collected funds based on the various inspection fees required of operating drilling rigs and wells; shutting down a rig would mean losing this flow of revenue. With incentives like these, how strict could we reasonably expect them to be?
In "Why the SEC Missed Madoff," the Wall Street Journal illustrated the results of the annual budget dance as put on by the Securities and Exchange Commission.
Its enforcers are rewarded for the number of cases brought and for following political fashion.
Bringing a lot of cases sounds like a reasonable way to measure investigators and it plays well with the legislature at budget time, but are they real cases? What good does it do to bring cases which end up dismissed?
What about the costs imposed on businesses by bogus charges? Even if they're dropped later, a charge by the SEC eats up a great deal of management attention and destroys economic value.
Justice Department attorneys are measured by how many years of jail time they're able to inflict, but this gives them incentives to destroy innocent people to further their careers as Elliot Spitzer did in New York. Mike Nifong succumbed to similar mis-incentives in the notorious Duke lacrosse team rape trial; both he and Spitzer eventually paid a just price for their abusiveness, but this sort of retribution for governmental wrongdoing is sadly rare.
The Journal explained the problem with measuring SEC investigators by the number of cases brought:
The IG's March 2010 report on the Alan Stanford matter highlights other endemic problems that bring us closer to what's gone wrong. As early as 1992, the staff of the SEC's Fort Worth, Texas, office strongly suspected Mr. Stanford of running a Ponzi scheme. Yet Ponzi and pyramid schemes, according to the report ... held low priority with SEC top management, who saw them as having little press appeal and afflicting only small investors looking to make a quick buck. Due to the uncooperative stance of the company and the offshore location of important documents, the regional office also feared that pursuing that matter would eat too many staff hours and so reduce the number of its filed cases ("stats," in agency lingo).
The SEC ignored a major Ponzi scheme for nearly twenty years because a) they wouldn't get enough press and b) investigating just one case would take too much time away from filing the required number of cases. When the Stanford Ponzi scheme blew up, the agency got some bad press, but nobody was fired.
This illustrates once again the fundamental problem with government regulation of commercial activity. Mr. Madoff was clearly a great deal smarter than any of the SEC attorneys who investigated him for decades. Mr. Stanford appears to have been equally intelligent and to have set up his company so as to make it unlikely that the SEC investigators would want to pursue him.
Anybody who can make money on Wall Street will earn a lot more money than someone who merely regulates Wall Street; almost by definition, the regulators will never be as intelligent, experienced, imaginative, or capable as the people they regulate. Them that can, do; them that can't, regulate.
We saw the same phenomenon in oil regulation - even though bureaucrats in the agency that regulates oil exploration are paid more than private sector workers doing comparable jobs, they're still paid less than people who actually know how to find oil and will always be behind as technology advances. This effect is beginning to creep into medicine with the passage of Obamacare. A good high-volume cardiologist can make a half-million a year. As the coming Obamacare regulations make it more and more difficult to operate a medical office, the best doctors are moving offshore.
The solution isn't to have government agencies do the regulating, it's to turn regulation over to private institutions such as Consumer Reports and Underwriters Labs. These organizations survive only as long as they maintain credibility with the public. Their employees have a stake in their survival, so they tend to be careful.
The SEC, in contrast, is put in place by law. No matter how lousy a job its people do, their jobs are protected by a budget given by Congress; and no matter how upset Congress might be, their only response is to throw the agency more money. What kind of a punishment is that?
The Securities and Exchange Commission is experiencing a crisis of public esteem, particularly for failing for more than a decade to bust confessed Ponzi-schemer Bernie Madoff and alleged Ponzi-schemer Alan Stanford. This week's $550 million settlement with Goldman Sachs over fraud charges notwithstanding, "Where was the SEC?" has a familiar ring.
The Milken-Boesky follies of the 1980s, the turn-of-the-century parade of financial frauds led by Enron, and the mutual-fund market timing scandal, all resulted in much hand-wringing over how the agency might be more proactive and generally faster off the dime. [emphasis added]
So long as there's no way to fire errant employees and so long as the agency's budget has no connection with its performance of its assigned mission, there'll be no way to fix it.
It is humanly impossible to expect any government agency to do its job effectively for one simple reason: from top to bottom, the managers and employees have no skin in the game. Despite the threat of EEOC lawsuits, every private employee knows that if he or she messes up too badly, the boss can quit paying. The employees as a whole know that if the businesses doesn't pay enough attention to customers, the whole thing can go bust and they'll be on the street.
Government employees, in contrast, can't be fired and they all get paid whether their agency does any actual work or not. There's no reason to work hard, so few do; there's no reason to work smart, so those who can generally find a much better-paying job in the private sector.
This isn't a new problem. The difficulty of managing government bureaucracies was documented in detail by Confucius 2,500 years ago. Unfortunately for the American public, our elected officials have a touching faith in the ability of government agencies to actually solve problems despite all evidence. However, our founders foresaw this problem and placed the final authority in the American people.
Come November, let's elect officials who're committed to shrinking government. Since government is utterly ineffective no matter how much we give it, we might as well keep the money and spend it ourselves as we choose.