DRI-287 for week of 9-8-13: Stop the Presses! ‘Government Does Not Spend Money Wisely.’

An Access Advertising EconBrief:

Stop the Presses! ‘Government Does Not Spend Money Wisely.’

When somebody tries to persuade you that they are smart by telling you something you already know, you are not impressed. When they insist that they just learned it after spending years wielding their expertise on the subject, you react by considering them stupid rather than smart. Alternatively, you suspect them of dishonesty. And when your informants turn out to have been highly placed officials in the government, you fear for the future of the nation.

That is the position in which Peter Orszag and John Bridgeland place readers of their article, “Can Government Play Moneyball?” which appears in the current issue of The Atlantic magazine. Orszag and Bridgeland have determined that “less than $1 out of every $100 of government spending is backed by even the most basic evidence that the money is being spent wisely.” To a substantial plurality of Americans – perhaps even a thin majority – this is about as surprising as the fact that the sun rose in the east this morning. But it is ostensibly a stunning revelation to the authors, who profess that “we were flabbergasted by how blindly the federal government spends.”

Are the authors anthropologists who just now returned to the United States after spending the last 50 years on an isolated tropical island, studying the native culture? As John Wayne might put it, not hardly. Both men are “former officials in the administrations of Barack Obama (Peter Orszag) and George W. Bush (John Bridgeland).” Both have sterling educational pedigrees (one in economics, one in law) that equip them to understand the logic of markets and the workings of government.

Both inhabit the belly of the Establishment beast. Orszag is a prep-school graduate and cum-laude PhD product of the London School of Economics. He was Director of both the Congressional Budget Office (CBO; 2007-2008) and the President’s Office of Management and Budget (OMB; 2009-2010). Bridgeland graduated from Harvard University and the University Of Virginia School Of Law and held down several positions in the Bush administration, including Assistant to the President, Director of USA Freedom Corps and Director of the White House’s Domestic Policy Council. He also taught a seminar on Presidential decision-making at Harvard’s Kennedy School of Government. Since 9/11, he oversaw over $1 billion worth of spending on domestic and international service programs. He currently heads a public-policy organization (Civic Enterprises) and vice-chairs a non-profit business created to eradicate malaria in less-developed countries. He is also a noted educational activist who drew attention to the “silent epidemic” of high-school dropouts.

Given their backgrounds, we can assume that Orszag and Bridgeland are not fools. In the first paragraph of their article, they state that “the federal government” is “where spending decisions are largely based on good intentions, inertia, hunches, partisan politics, and personal relationships.” How, then, can Mr. Orszag and Mr. Bridgeland possibly claim to be surprised by what they found when they went to Washington? And what inferences should we draw from their attitude?

The Authors Already Knew That the Federal Government Spends Unwisely

From childhood on, the authors’ own experience already ratified the idiocy of federal- government spending long before they set foot in Washington, D.C. They experienced Social Security withholding from their earliest paychecks. Their schooling taught them the rudiments of the Social Security system and its mandatory character. Orszag’s economics training introduced him to Paul Samuelson’s famous article rejoicing in the Ponzi-like, pay-as-you-go funding mechanism, which Samuelson considered a stroke of genius because the U.S. birth rate was then producing ever-larger streams of payers relative to recipients. And both authors have watched the ensuing baby bust drive the system into actuarial insolvency, bringing the day of default ever closer. Orszag and Bridgeland know only too well that Social Security has long been touted as the crown jewel of 20th-century liberalism’s welfare state. LIkewise, both men have observed Medicare and Medicaid approaching a similar fate after previously attaining similarly sacrosanct status. These entitlement programs are de facto examples of government spending even though they are off-budget in the technical accounting sense. After observing these examples, why should Messrs. Orszag and Bridgeland have been shocked by anything else they found?

“In other types of American enterprise, spending decisions are usually quite sophisticated,” the authors observe. They are referring to American business, the vineyard in which both toiled prior to government service and to which they retreated to recover from the shock of their exposure to profligacy and waste. Corporations formulate a capital budget, in which potential investment projects are evaluated by comparing the present value of their costs and benefits. Shareholders calculate the best alternative use of their money in investment of equal risk and compare it with their rate of return, enabling them to judge the wisdom of their investment choice. Sole proprietors gauge the best alternative use of their labor time – perhaps working as an employee – and compare it to the earnings from their business. These are the ways used to gauge the wisdom and effectiveness of spending decisions in the private sector.

We know these methods work well because the United States became the world’s leading economy midway through the 20th century after carving a small foothold on the North American continent in the 17th century. Other countries imitated our methods and enjoyed similar success. Countries rejecting our methods generally failed. Even the few Scandinavian countries that built successful welfare states did it by utilizing relatively free markets, while countries that moved away from free markets by nationalizing industry (such as Great Britain and Argentina) experienced drastic declines in their living standards).

The federal government – and government generally – has no rational method for evaluating its spending decisions. Private businesses spend money in order to create value for consumers. They gauge the success or failure of their spending by the size of their profits. The federal government ostensibly spends money to benefit the same people served by private business. But the federal government does not earn profit, thus cannot gauge its success by its profits. There is no true owner of its assets – when something is “publicly owned,” nobody owns it and nobody has an incentive to maintain it, husband its productive potential and maximize its value. The government does not normally sell its output to private citizens at prices that are free to fluctuate in accordance with the supply and demand for that output; thus, it cannot use price fluctuations to gauge the success of its efforts. Even if politicians wanted to, they have no way to gather the information necessary to tailor government spending to the desires of all their constituents, in the fashion of markets. Since no human being or institution possesses a complete picture of reality, both incentives and institutions must be favorably attuned to allow our subjective perceptions to satisfy individual wants. Free, competitive markets calibrate the key variables to produce this result while government fails utterly. The last thing politicians, bureaucrats and government employees can afford is a thoroughgoing analysis of government programs, their results and the reasons for them.

So politicians clasp hands earnestly to their breasts and swear to spend money for the benefit of “the 99%, not the 1%,” or “Main Street, not Wall Street.” That is, they profess “good intentions.” They pass baseline budgeting rules declaring that spending on federal programs must always rise by a certain percentage every year, no matter what (e.g., “inertia.”) Politicians spend money on electric cars and wind farms and ethanol subsidies because they have “hunches” that these measures are the wave of the future. First-year legislators are told that they must agree to support the spending programs of their incumbent colleagues in order to gain support for their own legislative proposals, thereby establishing “partisan politics” as a potent force behind wasteful spending.

The authors actually provide a specific example to bolster their choice of “personal relationships” as a roadblock to wise spending. In 2003, Bridgeland and officials at OMB judged that the Even Start Family Literacy Program was a waste of money. Why? Because the children and parents who participated in it showed no more gains in literacy than did those in a control group used for comparison. So the program was marked for elimination. “But Even Start was founded in 1989 by Bill Goodling, a well-liked Republican who had been the Chairman of the House Education and the Workforce Committee, and had previously served as a teacher, principal, and school superintendent in Pennsylvania. So Congress continued to fund this ineffective, if well-meaning, program to the tune of more than $1 billion over the life of the Bush administration.”

Orszag and Bridgeland left out a few important spending determinants from their list. For years, “fraud” and “abuse” have figured prominently in task-force reports on federal-government spending. Both men will recall the infamous “bridge to nowhere” of a few years ago. Fraud has risen to mammoth proportions in the Medicare and Social Security programs. Nothing was said about “graft” in the article, but the movie Mr. Smith Goes to Washington was released before both authors were born and it is safe to assume that both have seen it.

All in all, the faux outrage expressed by Orszag and Bridgeland lacks credibility. Their years of service in government allowed them to fill in the blanks of their indictment, but produced no other added value. They knew going in that the federal government was every bit as wasteful as they now portray it. Their disingenuous attitude – I’m shocked – shocked! – to find gambling going on here! – is borrowed from Claude Rains in Casablanca.

This is bad enough. Their proposed solution is worse. Citing “baseball’s transformation into ‘Moneyball’ as a case of private-sector spending sophistication, they aver that “the lessons of moneyball could make our government better.” You heard right. They don’t want to make government spend less. They want to make it spend better.

“Moneyball” in Government? Why Not “Nomoneyball?”

Orszag and Bridgeland maintain that “the moneyball formula in baseball – replacing scouts’ traditional beliefs and biases…with data-intensive studies of what skills actually contribute most to winning – is just as applicable to the battle against out-of-control health-care costs.” Their argument for assembling expert knowledge and applying it via central planning goes back at least as far as the “soviet of experts” advocated by institutional economist Thorstein Veblen in the early 1900s.

The problem is that it isn’t expert knowledge that is lacking as much as the “particular knowledge of time and place” conveyed by the price system and utilized best by the individual patient and doctor. That truth has already dawned on many doctors, patients and policymakers such as John Goodman of the National Center for Policy Analysis. Obamacare already embodies the demand for government-chosen best-practices medicine, but those choices will be made using the criterion of statistical significance. This is a recipe for disaster, since medicine in fields such as oncology has moved rapidly in the direction of individually tailored drugs and therapies rather than the “one-size-fits-all” approach implied by statistical regression. By its very nature, government action must involve coercion when flexibility and feedback are what is most urgently needed.

Thus, by applying the “moneyball” formula to health care, the authors are actually embracing the pretense of effectiveness in spending rather than the genuine article. They should be arguing for a return to the price system instead. “It is indisputable, however, that a move toward payments based on performance would harm some businesses. If most of your profits come from a medical device or procedure that …doesn’t work all that well, you’re likely to resist anyone sorting through what works and what doesn’t, never mind changing payment accordingly. Health-care interests are wise to invest millions of dollars in campaign contributions and lobbying to protect billions of dollars in profits.” The authors have just made the case against involving the government in health care and in favor of allowing free markets to work. Free markets are the best device ever invented for enforcing “pay for performance.” Leaving government out would eliminate campaign contributions and lobbying completely. As we will soon see, the authors’ method would accomplish none of these objectives.

The Moneyball Hook

The selection of “Moneyball” as the authors’ marketing hook reveals their lack of purpose. They try to persuade their readers by connecting emotionally rather than rationally. Moneyball was a tactic used successfully by one baseball team (the Oakland Athletics) during one pennant race. Its name derives from a book, but the authors picked it because of the successfully movie adapted from it.

Selling “free markets” would make perfect logical sense, since this is the same device that disciplines spending for thousands of businesses around the world. It has worked for centuries. But as a marketing concept, it has no sex appeal. No recent movie used it; no top-40 recording gyrated to it; no leading rap group is named for it. And the authors are only trying to sell a concept; they are not really trying to succeed in reducing spending or improving its quality.

How do we know the authors are not really trying? They tell us – not in so many words, but indirectly.

The System is Rigged Against Spending Changes or Reductions

The authors relate the history of so-called attempts to evaluate government-spending programs and jettison the ones that aren’t working. During the Clinton administration, the Government Performance and Results Act directed Congress “to provide for the establishment of strategic planning and performance measurement in the Federal Government.” The use of vague, circumlocutory language is a classic bureaucratic way of avoiding clarity and specificity – in this case, of avoiding commitment to eliminating wasteful spending. Sure enough, no link was established between performance assessments and continued funding by Congress.

The Bush administration, egged on by Bridgeland, established the Program Assessment Rating Tool (PART). This specifically identified programs that were not working as intended and tried to get them improved or discontinued.

Or did it? It seems that the assessment process has five possible outcomes. A program could be declared “effective,” “moderately effective,” “adequate” or “ineffective.” The fifth possibility was “results not demonstrated” due to insufficient data for evaluation. It is clear that four of the five possible outcomes were designed to justify continued funding, while even a rating of “ineffective” would not necessarily lead to termination of a program but would rather call for “improvement.” Not surprisingly, of the 1,000 programs assessed during Bush’s tenure, only 3% were adjudged “ineffective.” And Congress apparently ignored OMB’s recommendations to reform or abolish even that paltry percentage.

The reader might pause to consider that restaurants serving very good food go broke every day; an Internet review of “effective,” “moderately effective” or “adequate” would probably be the kiss of death in that business. And the people doing the rating have only their own inner fidelity to truth and honesty as an incentive to be honest in their evaluations – the institutional incentives for the federal government to discipline its own spending range from slim to none.

Beginning in 1990, the federal government has actually tested 11 large social programs, comprising some $2 billion in aggregate annual spending; using randomized controlled trials of effectiveness. The trials tested the results of spending by comparing the effects to those experienced by a control group who did not receive the benefits of the spending. 10 of the 11 programs showed either no effects on recipients or only a weak positive effect.

In some cases, programs were found to do positive harm. Government funding of so-called “Scared Straight” programs was found to “make kids about 12 percent more likely to commit a crime.” 21st Century Community Learning Centers, an afterschool program designed to improve academic performance of elementary-level students, has failed to affect academic outcomes but has increased the number of school suspensions and other behavioral infractions. Even this verdict of counterproductive was not enough to kill funding for the Learning Centers, which were saved by the intercession of then-gubernatorial candidate Arnold Schwarzenegger of California and are still receiving $1 billion in federal funds today.

Are the Authors As Mad As Hell? Are They Not Going to Take It Any More? Not Even Close

 

You might suppose that by now Messrs. Orszag and Bridgeland are mad as hell and aren’t going to take this any more. No, unlike Howard Beale, Network‘s “Mad Prophet of the Airwaves,” the authors are mildly irritated and ready to offer constructive alternatives. By golly, a non-profit organization called Results for America “is calling for reserving 1 percent of program spending for evaluation: for every $99 we spend on a program …we would spend $1 making sure the program actually works.” Don’t you just love those calls for action? Don’t you just love those non-profits?

“The more evidence we have, the stronger it is; and the more systematically it is presented, the harder it will be for lawmakers to ignore.” Uh… haven’t you just been telling us that they’ve done just that, for decades? “Still, linking evaluation to program funding will be tough, as both of us have seen in practice, again and again.” Aha. So the upshot of the authors’ ineffectual whining is that we’re supposed to do more of what’s conclusively failed in the past, but expect a different outcome this time. This is the operational definition of insanity – as if we weren’t already being driven insane by the actions of government gone wild.

Grasping at straws, the authors ask hopefully (drum roll, please):”What if we had a Moneyball Index, easily accessible to voters and the media, that rated each member of Congress on their votes to fund programs that have been shown not to work?” At ages 44 (Orszag) and 53 (Bridgeland), respectively, the authors are not too young to recall Sen. William Proxmire of Wisconsin, whose “Golden Fleece” awards were designed to attract media attention to Congressional spending projects that Proxmire felt were wasteful or even counterproductive. Awardees included a science grant to study why people fall in love, a study of Peruvian brothels (which proved particularly popular with its researchers) and a study of the buttock dimensions of airline stewardesses. (Proxmire’s awards were handed out from 1975 to 1987, when the job description of “airline stewardess” was still operative.)

The authors should ponder Proxmire’s fate. After a dozen-year run in which he actually succeeded in killing a few small-scale raids on the public treasury like the above examples, Proxmire’s career ended at age 74 in 1989. He didn’t retire due to age; his well-publicized physical-fitness regime made him perhaps the best-conditioned Senator. Instead, he was “retired” by the government-spending Empire, which struck back at him electorally when he finally lampooned a few too many of their pet projects. It should also be remembered that Proxmire, the scourge of wasteful spending, was a consistent supporter of dairy price-supports.

So much for “public shaming.” There is little point in shaming people who have no shame. Is there a group more institutionally bereft of shame than the U.S. Congress, whose poll approval rating hovers near single digits yet adamantly refuses to reform themselves?

Too Little, Too Late, Too Ineffectual

Figuratively speaking, Orszag and Bridgeland are canvassing the Titanic lifeboats to recruit passengers to go on iceberg watch. If there was ever a time to fussily insist upon substituting wise spending for wasteful spending, it expired nearly a century ago. Today, the Federal Reserve is directly buying new Treasury debt to the tune of a trillion dollars per year. Banks are husbanding $4 trillion or so in excess reserve accounts. The Fed has been desperately pegging short-term interest rates as close to zero as possible for years. It has not been trying to “stimulate the economy,” because it has encouraged banks to hold the reserves rather than loaning them out. (Had they been loaned out, we would have experienced hyperinflation.) Rather, it has been trying to buy time during which the Treasury can pay the lowest possible interest on outstanding debt, so as to keep interest payments from overwhelming the federal budget.

Orszag and Bridgeland should be advancing on the federal budget with a meat ax, intending to decapitate entire cabinet-level departments. They should be screaming at the top of their lungs in press conferences, not daydreaming about cutesy marketing ploys like “Moneyball” in the pages of a left-leaning opinion journal like The Atlantic (circulation: 400,000+). And they should have started their campaigns while still in government, not after bailing out to the private sector. The fact that two former “spending czars” – heads of CBO, OMB and DPA – were too timid to speak out against runaway spending while in government and still didn’t come within shouting distance of the whole truth years after leaving the bureaucracy tells us that there is no hope at all of reforming government from the inside. That is, the real shocker about this article is not even what the authors say; it is what they have refused to say.

What really motivated Orszag and Bridgeland to speak out? After all, they could have simply sat silent. Perhaps they were caught between two alternatives, like Buridan’s Ass. As members in good standing of the Establishment, they couldn’t simply up and admit that the federal government is one big welfare project – not for the purported beneficiaries, the program recipients, but for government employees who pick up paychecks while performing work of little or no true value. Yet neither could they do nothing while watching their country go down the drain. This half-hearted, empty-headed response was all they could muster.

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